Potential Good News for Canna Companies.
Managing Member Robert Ellerbrock takes a look at the recent news coming from the U.S. Drug Enforcement Administration (“DEA”).
The DEA has stated that it will move to reclassify cannabis from a Schedule I to a Schedule III substance under the Controlled Substances Act. The DEA will take public comments prior to publishing a final rule but only after the Office of Management and Budget (“OMB”) reviews the proposal and approves reclassification. The proposal would recognize the medical uses of cannabis, but it wouldn’t legalize it for recreational use. Specifically, the proposal aims to move marijuana from the “Schedule I” group to the less tightly regulated “Schedule III”. Here is what this reclassification means and its implications:
Schedule I substances are considered to have no accepted medical use and a high potential for abuse. The proposal seeks to reclassify marijuana to Schedule III. This would mark a historic shift in federal policy. Schedule III drugs include substances like ketamine, anabolic steroids, and certain acetaminophen-codeine combinations. Unlike Schedule I, Schedule III drugs have some medical uses and are subject to various rules. However, they are still controlled substances.
The reclassification to Schedule III would be a monumental shift for the cannabis industry. The move to Schedule III would relieve companies in the industry from Section 280E of the Internal Revenue Code, which forbids cannabis businesses from deducting otherwise ordinary expenses (rent, payroll, etc.) from gross income associated with the “trafficking” of Schedule I or II substances. In addition, the change to Schedule III may allow cannabis companies list their stock from the OTC markets to the U.S. stock exchanges. Additionally, credit card processors, banks, and financial institutions will be less averse to doing business with cannabis companies, which could result in easier and more commercially reasonable access to credit and capital.
In regard to Cannabis 401(k) plans, the shift to cannabis being classified as a Schedule III may allow companies to take advantage of potential tax credits of up to $5,500 per year for the first 3 years.The reclassification may also allow for potential employer contribution credit of $1,000 (maximum) per employee. Nonetheless, not having access to credits doesn’t prevent a cannabis company from participating in a 401(k) plan right now.
While the DEA’s proposal is exciting for the cannabis industry, it is still a long way of implementation, as it must still go through OMB review, the public comment period, and the rule making, which will need to make its way through the never quick bureaucratic process.
Even though it may be a while, the DEA’s decision to reclassify cannabis from Schedule I to Schedule III is undoubtedly a watershed moment for the cannabis industry.
