In a significant shift in United States drug policy and regulation, the Biden administration is planning to reclassify marijuana as a less dangerous drug. The proposed reclassification, led by the U.S. Drug Enforcement Administration (DEA), acknowledges the medical benefits of cannabis and its lower potential for abuse compared to other controlled substances.
The White House Office of Management and Budget is currently reviewing this proposal. If approved, marijuana will be moved from being a Schedule I drug, alongside substances like LSD and heroin, down to a Schedule III classificaiton.
- However, this does not mean that marijuana will become legal for recreational use nationwide.
- Instead, the move would facilitate research and recognize the evolving acceptance of cannabis in the U.S.
Of course, this decision has its critics, but it's worth noting that the change would also impact federal income tax breaks for many cannabis businesses.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Biden on marijuana reclassification
Under federal law, marijuana is currently classified as a Schedule I controlled substance, making it illegal to grow, transport, or sell. The Biden proposal would reclassify the substance to Schedule III alongside substances like steroids.
Some critics express concerns about potential side effects and marijuana purportedly being a "gateway drug." Proponents argue that rescheduling marijuana is a step in the right direction, emphasizing the need to align federal policy with the growing acceptance and legalization of cannabis at the state level.
President Biden initially called for a review of federal marijuana laws a couple of years ago, a move paired with efforts to pardon individuals convicted of marijuana possession offenses. Meanwhile, 38 states and the District of Columbia have approved marijuana for medical use. Close to half of U.S. states have approved recreational use.
Cannabis rescheduling 280E tax
Lessening federal regulations concerning marijuana could reduce the tax burden on cannabis businesses. That’s because a significant tax provision cannabis operators in the U.S. deal with is Section 280E of the Internal Revenue Code.
Section 280E restricts cannabis businesses from claiming tax credits and deductions for expenses incurred in their business operations. Businesses cannot deduct expenses associated with the "trafficking" of Schedule I or II substances.
Consequently, Section 280E disallows deductions for many ordinary business expenses of cannabis businesses, like rent and employee compensation, when calculating federal taxable income. This limitation can result in higher tax bills for those businesses. Data show that in 2022, marijuana businesses paid nearly $2 billion more in federal taxes compared to “ordinary businesses.”
State cannabis tax
However, some states have taken steps to alleviate this burden by decoupling from 280E. This means cannabis businesses operating in certain states can deduct certain business expenses on state tax returns.
- For example, Virginia, Massachusetts, Missouri, and Maryland are recent states that have excluded IRC 280E from their tax codes.
- But, according to the cannabis advocacy organization the Marijuana Policy Project, several other states, including but not limited to California, Colorado, Connecticut, New York, and Oregon, have eased state tax restrictions related to 280E.
It’s important to note that not all states have implemented decoupling measures. So, without the DEA marijuana reclassification change, cannabis businesses in those states would remain subject to the full impact of Section 280E on federal and state tax bills.
Biden marijuana proposal: Bottom line
As the DEA moves forward with the regulatory process, which could take some time, stakeholders should monitor any developments.
For example, on May 1, Sen. Cory Booker (D-NJ), Majority Leader Chuck Schumer (D-NY), and U.S. Senate Finance Committee Chairman Ron Wyden (D-Ore.) reintroduced the Cannabis Administration and Opportunity Act. The legislation proposes to end the federal prohibition of cannabis.
In the meantime, cannabis businesses should continue to navigate Section 280E, seeking guidance from qualified tax professionals to optimize tax strategies and ensure compliance with applicable and evolving regulations.
Related
-
Dow Dives 797 Points as Government Opens: Stock Market TodayThe process of pricing and re-pricing realities old and new never stops, and next week promises to be at least as exciting as this week.
-
3 Ways High-Income Earners Can Maximize Their Charitable Donations in 2025Tax Deductions New charitable giving tax rules will soon lower your deduction for donations to charity — here’s what you should do now.
-
3 Ways High-Income Earners Can Maximize Their Charitable Donations in 2025
Tax Deductions New charitable giving tax rules will soon lower your deduction for donations to charity — here’s what you should do now.
-
An HSA Sounds Great for Taxes: Here’s Why It Might Not Be Right for YouHealth Savings Even with the promise of ‘triple tax benefits,’ a health savings account might not be the best health plan option for everyone.
-
New RMD Rules: Can You Pass This Retirement Distributions Tax Quiz?Quiz Take our RMD quiz to test your retirement tax knowledge. Learn about RMD rules, IRS deadlines, and tax penalties that could shrink your savings.
-
Ten Retirement Tax Plan Moves to Make Before December 31Retirement Taxes Proactively reviewing your health coverage, RMDs, and IRAs can lower retirement taxes in 2025 and 2026. Here’s how.
-
When to Hire a Tax Pro: The Age Most Americans Switch to a CPATax Tips Taxpayers may outsource their financial stress by a specific age. Find out when you should hire a tax preparer.
-
The Original Property Tax Hack: Avoiding The ‘Window Tax’Property Taxes Here’s how homeowners can challenge their home assessment and potentially reduce their property taxes — with a little lesson from history.
-
Social Security Tax Limit Rises Again: Who Pays More in 2026?Payroll Taxes The Social Security Administration has announced significant changes affecting millions as we approach a new year.
-
Three Critical Tax Changes Could Boost Your Paycheck in 2026Tax Tips The IRS predicts these tax breaks may change take-home pay in 2026. Will you get over $1,000 in tax savings?
