New Tax Rules In Cannabis: What Are The Consequences DEA Rescheduling?

In a significant shift for the cannabis industry, marijuana is set to be reclassified as a Schedule 3 controlled substance. While this change does not address the ongoing federal prohibition, removal of the 280E IRS tax code will have substantial consequences for the cannabis space, particularly for retailers and plant-touching operators.

Tax Relief And Financial Implications

The rescheduling will greatly benefit the tax framework affecting cannabis companies. Historically hindered by the punitive Section 280E of the IRS code, which prevented businesses dealing with federally illegal substances from deducting ordinary business expenses, the industry faced an excessive tax burden. These figures from Whitney Economics concluded that the industry paid $1.8 billion in excess taxes due to IRS restrictions in 2022.

This shift in cash flow is expected to significantly enhance company balance sheets and improve the overall financial health of the sector. Companies that were profitable on paper but financially constrained will likely see marked improvements in their financial statements.

As cannabis rescheduling seems to be right around the corner, why not join us to talk more about how all of this will affect the future of the industry? Hear directly for top executives, investors, policymakers and advocates at the 19th Benzinga Cannabis Capital Conference, coming to Chicago this Oct. 8-9. Get your tickets now before prices surge by following this link.

Industry Perspectives On Long-Term Consequences

Tim Seymour, an industry analyst, discussed the potential long-term implications of this decision on CNBC’s Fast Money. He highlighted the likely increase in institutional support and broader economic and structural reforms that will follow the rescheduling.

Pot stocks lighting up as rescheduling moves closer to reality@TimSeymour breaks down the implications on a huge day for cannabis: pic.twitter.com/4aF8jUdKZ5

— CNBC's Fast Money (@CNBCFastMoney) April 30, 2024

Matt Darin, CEO of Curaleaf CURLF, also commented on the broader implications, suggesting that this move could signal to policymakers the need for regulation similar to other industries. “Any step forward certainly helps in the normalization of cannabis and demonstrates that there is broad support. I think it sends a signal to those in DC… this (cannabis) belongs regulated similar to other industries, but it’s a separate process,” Darin said.

M&A Coming Our Way

Darin laid out the direct financial benefits for Curaleaf. “We are paying an excess of 150 million dollars in taxes to the federal government, so freeing up that cash flow to reinvest in expansion, personnel, new business, I think is getting the attention of institutional investors,” he explained. “It’s an incremental step… It will open up the market and we will see in general more M&A activity begin to pick up which has really been quiet due to challenges in the capital market.”

The adjustment is anticipated to invigorate market dynamics, potentially increasing mergers and acquisitions activity, which has been subdued due to capital market challenges.

Long-Term Consequences

Other long-term consequences include increased opportunities for scientific research; decreased legal and financial costs attributed to complex regulatory compliance; potential impacts on interstate commerce and effects on the global economy, where the U.S. plays a huge role in setting regulatory standards for controlled substances.

As you can see, the triumph of common sense will have lasting consequences for cannabis.