Over five decades ago, the U.S. Drug Enforcement Administration (“DEA”) classified marijuana as a dangerous drug and determined it to be a Schedule I drug (the most dangerous category) under the Controlled Substances Act (“CSA”). As of 2024, 41states and the District of Columbia, plus three U.S. territories, have legalized marijuana for medical and/or adult recreational use. It’s been more than a decade since Arizona legalized marijuana for medical use, and now, the DEA has finally decided to reschedule marijuana to a Schedule III drug (a less dangerous category, but still a controlled substance).
A Schedule I drug is a drug that the DEA has determined has no accepted medical use and has a high potential for abuse. Drugs in this category include heroin, ecstasy, and currently marijuana. A Schedule III drug has a moderate to low potential for physical and psychological dependence and includes drugs like Tylenol with codeine, testosterone, and certain steroids
In August of 2023, the U.S. Department of Health and Human Services recommended the rescheduling of marijuana to the DEA. The push to reschedule marijuana to a lower-scheduled drug has intensified in the last year. On April 30, 2024, the DEA announced that the rescheduling of marijuana will happen. The exact date that marijuana will be rescheduled is unknown and is subject to various rule-making processes that occur at the federal level, which can be somewhat time-consuming. It is expected, however, to occur by the end of the year and there is some speculation that it will occur prior to the November election.
What rescheduling means is that marijuana will still be generally illegal at the federal level but that it could be subject to federal approval for availability as a prescription drug. In other words, it means that nationally, medical marijuana could become available in all 50 states, but availability in any particular state would depend on the laws of that state. It would also open up opportunities for medical and scientific research since those efforts have thus far been thwarted by its Schedule I scheduling status.
Perhaps the biggest change with rescheduling marijuana is on a tax level. Cannabis businesses will be able to use Internal Revenue Code Section 280E on their taxes, which will permit them to deduct their business expenses and take other available credits – something which they are currently prohibited from doing. Schedule I and II drugs are excluded from the tax advantages offered by Section 280E because persons who deal in such drugs are considered drug traffickers; persons who deal in Schedule III drugs are not. As such, cannabis businesses are likely to see improved overall financials and cashflow – and better bottom lines. It could mean the difference between smaller cannabis businesses being able to stay in business versus becoming insolvent.
Even with rescheduling, the states that have legalized marijuana for adult recreational use will continue to be at odds with the federal scheme. However, rescheduling is a big step for the industry and is expected to provide significant relief to cannabis businesses.