The Drug Enforcement Administration is considering reclassifying marijuana under the Controlled Substances Act, a move that would potentially allow state-licensed marijuana businesses to take a tax deduction for their ordinary and necessary business expenses.
The CSA places marijuana in Schedule I, the most serious of five categories provided under the act, reserved for substances with the greatest potential for abuse and no medical value. According to section 280E of the Internal Revenue Code, no deductions are allowed on any amount from a trade or business that "consists of trafficking in controlled substances."
However, the section only applies to Schedule I and Schedule II drugs. In addition to marijuana, Schedule I also includes such addictive drugs as LSD and heroin, whereas cocaine and methamphetamine are both in Schedule II.
Were the DEA to decide to reclassify marijuana in Schedule II, it would make it "somewhat easier to do some medical research" than at present, but it would not extend the business expense tax deduction to retail outlets and medical dispensaries that sell state-legal marijuana. If the DEA reschedules marijuana as a Schedule III or lower drug, it would potentially provide marijuana-related businesses with a tax deduction for their ordinary and necessary business expenses.
The federal government has come under increasing pressure from the public and from policy makers to change course on marijuana policy as more and more states legalize its use for medical and recreational purposes and as health professionals tout its therapeutic benefits. At present, medical marijuana is legal in 23 states plus the District of Columbia. Recreational marijuana is legal in Alaska, Colorado, Oregon, Washington and the District, according to NORML,a national pro-legalization group.