12d • General discussion
Medical Marijuana Moved to Schedule III
The Department of Justice finally got around to rescheduling medical marijuana from Schedule 1 to Schedule 3. This move was expected and had been announced months earlier, but apparently today was the day they actually pulled the trigger.
So why am I writing about it here in the Tax Strategy Network?
What a lot of people not in the tax business don't understand is that Schedule I activities are not legal for federal tax purposes. And there's a regulation called Section 280E that limits the tax deductibility of everything except for the cost of goods sold.
So if you had a dispensary retail store that was legal in your state and you had a thousand dollars worth of sales, you were only permitted to deduct the cost of goods related to that thousand dollars, which might be three hundred dollars worth of costs. The other expenses that you have for operating the business were non-deductible.
So your store rent, your utilities, your payroll costs for running the retail arm of the business: all of those were expenses that you were not able to deduct, and so you were, in effect, paying taxes on money that you had already spent.
With this rescheduling change that releases the restrictions from Section 280E and allows for the deduction of those operating expenses.
The net result is that the tax bills for these kinds of businesses are going to go down dramatically.
It's a great example of how carve-out legislation can alter the tax position of something that might not be apparent from a first glance.
The tax code is filled with carve-out language, and it's part of the job of tax strategy to figure out which of these apply to which situations and take as best advantage of it as possible.
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Medical Marijuana Moved to Schedule III
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