On May 1, 2024, the Drug Enforcement Agency of the federal US government (“DEA”) announced it was in serious consideration of rescheduling Cannabis from Schedule I to Schedule III. This moves cannabis from a “dangerous” drug to a “not dangerous” drug. That change in designation makes IRC 280E NOT APPLICABLE to cannabis.

This is a huge deal.

See our panel discussion on this breaking industry topic with Summer Thorn, CPA, MBA, captured below on May 9, 2024.

In preparation of an income tax return for a cannabis entity, it would look like a tax return for any other kind of business.

  • Accelerated depreciation can be taken.
  • All sales and marketing expenses, like Weed Maps, etc., will all be tax deductible.
  • All officer wages will be tax deductible, regardless of the duties of the officer.
  • All budtender and other wages and salaries will be tax deductible.
  • All assets will be tax deductible rather than just assets classified in COGS.
  • Taxable income will be based upon the normal calculations of a tax return, not income less COGS as it is now.

An interesting aspect of having rescheduling occur due to DEA involvement is that this may lead to a bifurcation of the cannabis industry between medical sales and adult-use sales. DEA deals with rescheduling of “Drugs,” but it may not impact anything regarding adult use.

It is easiest for me to illustrate this in action using California as the example, and more specifically Los Angeles. If a canna business goes to the State to apply for a retail sales permit, it will have a medical sales number and an adult use sales number. This also follows when the canna business receives its city licenses: one for medical use, one for adult use. When reporting sales to the city, the canna business reports on two lines of the tax return because sales are taxed separately.

Okay, not too hard to do at the sales end of the supply chain.

Now, let’s back it through to cultivation. In 2018, when adult use was legalized in California AND there was cultivation excise tax, the cultivation excise tax return had to be prepared reporting how much canna had been GROWN for medical vs. GROWN for adult use. There may have been some very specific situations where the growth was specifically for medical purposes, but in general, there was ZERO distinction. After a couple of years, the state realized that there was no difference and modified the form to report on canna in total, not split into pieces.

But now… if the DEA reschedules ONLY medical use cannabis, then it may lead to that part of a business NOT being subject to 280E. That will leave adult-use cannabis still SUBJECT TO 280E. WOW, who wants to do bookkeeping for that arrangement?!?!!

As a last note, it very well could be a year or more for this rescheduling to work its way to full approval, so for the 2024 income tax year, plan on sticking with your accounting and tax as you did in 2023 and before with no change.

Please reach out to us to discuss your specific situation. Info@CannabisCPA.Tax.