The Justice Department is changing its classification for some marijuana products, downgrading them from Schedule I drugs — the same level as heroin and LSD — to Schedule III, which is the same as drugs like testosterone, ketamine, and steroids. The change applies to medical marijuana regulated under state licenses and could mean a major tax break for some cannabis businesses.
Anyone who sells Schedule I substances can’t deduct business expenses from their taxable income. That’s had a big impact on cannabis companies, according to Victoria Litman, a visiting professor of law at Roger Williams University.
“So you can't deduct the rent, or the salaries of your employees, or most of the things you need to run your business,” she said.
Cannabis businesses often end up with a really high effective tax rate — upwards of 70%, Litman said. But now, medical cannabis companies may be able to deduct their business costs.
That could free up a lot of cash, said Scott Greiper, CEO of Viridian Capital Advisors. “You're able to redeploy that former tax payment into scaling your business, hiring more people, standing up another store.”
Things could get complicated, though, Litman noted, because many cannabis retailers have licenses for both medical and recreational sales.
“And so this creates sort of an accounting headache where they're trying to separate out, ’Oh, these expenses are related to my medical program. These expenses are related to my adult-use program. I can deduct the ones related to medical,’” she said.
The industry — and consumers — may get more clarity in a few months. The Justice Department has scheduled a hearing for late June, when it says it will “evaluate broader changes to marijuana’s status under federal law.”
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