Today, in a seismic shift in long-standing US drug policy, the Trump Administration, reclassified marijuana from a Schedule I to a Schedule III. Or did they? The DOJ order does not provide such broad reclassification as was expected, or as is being interpreted. The reclassification applies strictly to companies that are medicinal operators and not for recreational use. This would apply to medical marijuana dispensaries, in addition to pharmaceutical companies that are producing FDA approved medicinal marijuana products.
While this undoubtedly has many dispensaries, patients, and long-haired hippies rejoicing, there are some pretty broad tax implications that this shift in policy will produce. Until today, these medical marijuana companies have been hindered by a pesky Internal Revenue Code, Section 280E. 280E prevents the deduction of ordinary business expenses if you or your business is engaged in the sale of Schedule I drugs. This regulation came into existence from the legal proceedings of a clever cocaine dealer who attempted to deduct the expenses associated with the distribution of this illicit substance. This argument, while novel, led the IRS to create a code section to prevent this type of deduction in the future.
The 280E restriction has been applied to the purveyors of cannabis, ever since the legalization process began at the state level. By not allowing these companies to deduct ordinary business expenses that any other business could deduct, it greatly inflated the profitability of these businesses and in turn increased tax that the IRS could collect on said profit. Many in the industry found it next to impossible to try to make an actual profit when they were being taxed on pre-expense income.
However, the reclassification today changes the applicability of 280E for many in the cannabis space. Now these businesses are able to deduct the full amount of the expenses that they are incurring, which will have a huge impact on the tax revenue that is collected from these businesses at the Federal level. While the reclassification has not changed the applicability of 280E for recreational marijuana companies, it will have far-reaching effects on the industry as a whole. This change is welcomed by many, but we should all be cognizant of the dramatic anticipated reduction in tax revenue, at a time when Federal spending continues to increase. For now, these pot purveyors can celebrate with a celebratory joint, but the rest of us should keep an eye on this issue and the implications of this change moving forward.
Adam Holleran, EA
(720) 452-2961
Timberline Tax Group, LLC