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Recreational adult-use cannabis is legal in 23 states and D.C., and medicinal use has been permitted in 38 states. The momentum for the cannabis industry has never been higher. The wide adoption at the state level could even be swaying opinions at the federal level.
Recently, the Department of Health and Human Services (DHHS) made a recommendation to the Drug Enforcement Administration (DEA) to reclassify cannabis from a Schedule I drug, reserved for the riskiest drugs like heroin and LSD, to a Schedule III, reserved for anabolic steroids, ketamine, and testosterone, which can be obtained with a prescription.
Past rescheduling requests have failed, including in 2016, when the DEA denied a request from two Democratic governors to change the classification. The decision to reclassify is ultimately up to the DEA, which could take a while to complete its evaluation. It’s worth pointing out that historically, the DEA has never overridden a DHHS recommendation.
The implications of this reclassification could be highly beneficial to operators of cannabis companies across the country.
Reclassification could carry significant tax benefits
Under the current IRS code 280E, businesses that sell cannabis products are taxed on gross income and are not allowed to deduct business expenses. This code creates substantially higher tax rates for these companies and diminishes any profit margins they otherwise would have had.
Could reclassification improve access for the cannabis industry?
Those in the industry are celebrating the DHHS recommendation, stating that it brings a certain legitimacy to the industry and expanding the number of people who can benefit from a reclassification.
Cannabis companies are often prohibited from accessing critical resources due to its illegal classification under federal law. For example, banks and financial institutions fear facing federal repercussions for serving cannabis businesses, making it difficult for cannabis companies to access traditional banking services like checking accounts, payroll, and lines of credit. The lack of conventional financial support has hindered the ability of many entrepreneurs to raise capital for operations leading to a cash-dominant business model that creates a multitude of issues for a multi-billion-dollar industry. Cannabis banking reform has been introduced several times, and each time has failed to make it through Congress.
Workers in the cannabis industry, despite tremendous growth and widespread adoption, are still unable to access a traditional 401(k) plan. Similar to the plight of banks and financial institutions, 401(k) providers are hesitant to work with companies in the cannabis industry for fear of violating the Bank Secrecy Act and other federal laws that govern financial institutions. Taking money from workers involved in a business that is illegal at the federal level and then reformatting that money into equities in a mutual fund (or stock) could be considered money laundering. This association leaves workers in the cannabis industry without 401(k) options despite accounting for more jobs than firefighters, machinists, and other professions combined.
This is not to say that reclassification will solve these major problems for the industry, but it may lead to continued momentum that results in even more significant changes.
Dedicated cannabis specialists in various markets
The cannabis industry requires careful examination of accounting practices, certifications, licenses, and federal, state, and local tax information. UHY has a dedicated team of cannabis tax and accounting professionals with cannabis industry experience to help companies navigate this heavily regulated and ever-changing landscape. If you have questions, please call or fill out the form on this page. Someone will be in touch to discuss cannabis accounting, taxes, and more.
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