The U.S. Drug Enforcement Administration Poised To Reclassify Cannabis

The U.S. Drug Enforcement Administration (“DEA”) is poised to reclassify cannabis on the Federal Schedule of Controlled Substances from a Schedule I to Schedule III substance. For more than 50 years, cannabis has been erroneously classified as Schedule I, defined as lacking accepted medical use and posing high risks of addiction and abuse.

Rescheduling is a significant step forward for cannabis legalization. It also moves the country toward a cohesive state and federal cannabis policy.

Due to public interest in cannabis policy, the next step will likely be review by the Office of Budget and Management, followed by “Notice and Comment” rule making.

While rescheduling will not make state cannabis programs legal under federal law, it could stabilize aspects of the market by minimizing actual and perceived risk.

For example, once cannabis is reclassified as a Schedule III substance, it will no longer be subject to Section 280E of Internal Revenue Service Code, which severely limits deductions for cannabis businesses. Effective tax rates often reach 70% or more. Relief from 280E will free up capital and increase investor appeal, while banking reform continues to stall.

Restrictions on real estate, banking, and access to bankruptcy due to cannabis’ illicit status are subject to change as well. Even before the DEA announcement, the IRS recently clarified that presence of cannabis alone does not justify checking the Form 8300 suspicious activity box, signaling that state regulation is working.

Please contact Miller Johnson’s Cannabis Practice Group for guidance on how to best position your cannabis company in a Schedule III market.