A cannabis retailer’s FAQ about rescheduling

Being able to deduct business expenses would be a game-changer for retailers, but there’s no telling if and when it will happen.
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· 4 min read

Cannabis recently moved one step closer to being reclassified, meaning that while it would remain illegal under federal law, it would be grouped with drugs that face fewer restrictions. Known as “rescheduling,” the process got a boost in September, when the Department of Health and Human Services recommended that the Drug Enforcement Administration (DEA) reclassify cannabis from a Schedule I to a Schedule III drug. Now the Department of Justice has seconded the recommendation, setting in motion a months-long process that will include a review by the White House Office of Management and Budget and a public comment period.

The potential rule change could have a profound impact on cannabis retailers, who will finally be able to deduct a large portion of their business expenses. Here’s a summary of what cannabis rescheduling means and its potential impact on retailers.

What does rescheduling mean?

Cannabis is now considered a Schedule I substance, putting it in the same category as heroin, LSD, and ecstasy, or what the DEA calls “drugs with no currently accepted medical use and a high potential for abuse.” The proposal to reclassify cannabis as Schedule III would put them in the same category as Tylenol with codeine, ketamine, and testosterone—“drugs with a moderate to low potential for physical and psychological dependence.”

What is 280E?

It’s a section of the tax code that was enacted in 1982, after a Minnesotan named Jeffrey Edmondson, who’d been arrested for possessing cocaine with intent to distribute, was then informed by the Internal Revenue Service that he owed $17,000 in back taxes for his drug dealing.

Edmonson, according to a 2023 account in MG Magazine, in turn had the chutzpah to file a tax return where he declared $110,000 in business-related deductions for the sale of the cocaine and other drugs—and after being challenged by the IRS, won in tax court in 1981.

Section 280E was adopted the next year to prohibit tax filers who sold Schedule I or Schedule II drugs from writing off business expenses. But there is a type of expense cannabis businesses can deduct today: the cost of goods sold (COGS)—the term for the price they paid for their inventory.

How are cannabis retailers treated differently when it comes to deducting business expenses?

Retail Brew asked Naomi Granger, founder and CEO of the National Association of Cannabis Accounting and Tax Professionals, to provide a hypothetical scenario to illustrate how annual tax returns for a typical retail store differ from a cannabis store.

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Here’s the scenario Granger offered: Say both a typical retailer and a cannabis retail store earned $1 million in revenues, and both paid $500,000 for their inventory, aka their COGS. This leaves a gross profit for both stores of $500,000.

If both stores also paid another $250,000 in operating expenses, which include payroll, utilities, rent, marketing—essentially all costs of running a business—that would leave a net profit for both stores of $250,000.

Here’s where 280E comes in: The cannabis store has to pay taxes on its gross profit, but the typical retailer that can deduct its operating expenses pays taxes on its net profit.

With small businesses paying an average tax rate of about 20%, that means the cannabis store would be paying $100,000 in federal income tax ($500,000 x 0.2) whereas the typical retail store would pay just $50,000 ($250,000 x 0.2).

But if rescheduling goes through, the cannabis retailer would be able to deduct its operating expenses and pay the same as the non-cannabis retailer: $50,000.

“So it’s going to increase cash flow,” Granger told Retail Brew.

What’s the time frame for when rescheduling might happen?

Bloomberg estimates that after the Office of Management and Budget reviews the proposal, public comment and hearings could be complete by the end of this year, and take effect late next year. But Bloomberg also notes that if Donald Trump is reelected, his administration could put the kibosh on it.

If the law does change, will it only apply for the rest of that tax year?

“That is one of the big unknowns,” Granger said.

If the change goes through in, say, July 2025, she said, it could be a scenario where cannabis retailers can only deduct their operating expenses for the rest of the year. Or it could take effect retroactively to the beginning of 2025, or it could wait to take effect until the full 2026 tax year.

There’s another scenario that probably would be too good to be true for cannabis retailers.

“Or they can say it’s retroactive from when you started your business,” Granger said, but “I doubt that’s going to happen.”

Retail news that keeps industry pros in the know

Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.