Deschedule Cannabis, Don't Reschedule It: Part 2

Last week, I wrote a piece titled “Deschedule Cannabis. Don’t Reschedule it.” This post came on the heels President Joe Biden’s announcement about the federal government’s consideration of federal scheduling of cannabis. As I pointed out, rescheduling cannabis to schedule 2 or lower is a bad idea as it would expose cannabis to DEA regulations, similar to prescription drugs. This post will focus on the tax implications for cannabis businesses if the federal government reschedules cannabis to schedule II. This topic has been discussed many times over the years. Section 280E explains in detail:

If the trade or business involves the trafficking of controlled substances (within scope of schedule I and II under the Controlled Substances Act), then no deductions or credits are allowed.

Businesses that “traffick” in Schedules I and II of the Controlled Substances Act can’t take federal tax deductions. There are some COGS exceptions, but they are not included in this post. Because it cannot take standard deductions, any state-licensed cannabis company is currently subject to higher taxes than if it were selling other consumer goods. If a business sold drugs that were on schedule II and did not have the appropriate entitlements, it would be subject to 280E.
Let’s now take a look at the rescheduling issues. The Drug Enforcement Administration would reschedule cannabis to schedule II. This would allow cannabis to be prescribed by licensed healthcare professionals (in contrast to current physician recommendations). Rescheduling cannabis to schedule II would not make all state-licensed cannabis businesses federally licensed. They would remain illegal under federal law, and a new channel would be created for federally-legal physician prescriptions.
This means that DEA would reschedule cannabis. However, all state-licensed marijuana businesses would still be in violation of federal law. Instead of trafficking in a Schedule I narcotic drug, they would instead traffic in a Schedule II narcotic. This would mean that the section 28oE would still apply and that cannabis businesses would not receive much relief. It is not a good idea to move cannabis to schedule II.
If President Biden wants to reschedule marijuana, it would be best to do so on schedule III or lower, which would avoid 280E. As I said in my previous post, rescheduling marijuana would cause more problems than just descheduling it.