The job recruitment page on the official website of the U.S. Drug Enforcement Administration (DEA) states the following:

Do you have what it takes to make a difference? The DEA is America’s resolute force fighting against the illegal drug trade. DEA Special Agents pursue the most notorious trafficking and narco-terrorist organizations that threaten our country.

The DEA, home of America’s fearsome narcotics agents (aka “narcs”), is poised to reclassify marijuana to a lower-risk category. This shift promises to reshape the landscape of the cannabis industry and help boost the profitability of weed companies.

For decades, the DEA and marijuana purveyors have been sworn enemies. No longer. Who would have expected the nation’s narcs to become big benefactors of the pot trade?

As I explain below, reclassifying marijuana would yield significant benefits for cannabis businesses, granting them access to tax incentives that are currently unavailable.

Currently, marijuana is designated as a Schedule I drug alongside substances such as heroin, characterized by the DEA as having “no accepted medical use and a high potential for abuse.” This Schedule I classification places marijuana in a more severe category than drugs such as fentanyl, Vicodin, cocaine, and methamphetamine, which occupy Schedule II. To regard marijuana as more dangerous than these drugs is, of course, a travesty.

In response to a directive from the Biden administration to reassess marijuana’s status, the U.S. Department of Health and Human Services (HHS) has proposed that the DEA move marijuana to Schedule III, a category occupied by drugs such as anabolic steroids, ketamine, and Tylenol with codeine.

The DEA has taken steps to advance this proposal, pending final approval from the Office of Management and Budget. Once approved, the DEA will seek public feedback before formalizing the reclassification.

It’s crucial to note that rescheduling does not equate to federal legalization. Possession of marijuana would still be subject to federal criminalization, albeit possibly with reduced penalties.

Regardless, a loosening of marijuana’s federal classification under the Controlled Substances Act would have profound implications for businesses and researchers. Due to weed’s Schedule I status, marijuana businesses face high tax rates and limited deductions, which would be alleviated by a lower scheduling status. Reclassification also would remove yet another social stigma against marijuana and grease the skids for legalization by additional states.

More favorable IRS treatment…

Once cannabis is transferred to Schedule III, IRS rule 280E would no longer apply, and cannabis businesses would be able to take the same federal tax deductions as any other business. That’s a long-coveted goal of marijuana entrepreneurs.

Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances.

Removal of 280E would be a particular boon for start-up marijuana companies that initially carry large debts loads immediately after going public. If rescheduling is completed sometime in 2024, it’s likely that 280E taxation on cannabis companies would end retroactively to January 1, 2024.

Also, any states that still follow the IRS in calculation of their cannabis companies’ state income taxes, such as Alaska, Arizona, and Nevada, will follow this change and allow full deductions.

Marijuana companies would reap substantial federal tax savings. The majority of retail cannabis businesses have shouldered an effective tax rate in excess of 70%, whereas mainstream businesses pay closer to 21% tax on corporate income (see chart).

Cannabis research firm Whitney Economics recently conducted an analysis of federal taxes on the cannabis industry. In 2022 alone, cannabis operators paid over $1.8 billion in additional taxes when compared to ordinary businesses. This excess is estimated to have reached $2.1 billion in 2023.

Additionally, research into the medical benefits of marijuana would be less encumbered under Schedule III, leading to more medicinal products approved by the U.S. Food and Drug Administration (FDA).

Rescheduling marijuana from Schedule I to Schedule III also carries symbolic weight, signaling a departure from Uncle Sam’s stringent prohibitionist stance toward a more nuanced regulatory approach. This shift will likely serve as a precursor to broader federal legalization efforts and a more uniform regulatory framework for marijuana use.

Marijuana dealers are collectively saying to the nation’s narcs: “Thank you.” I guess If you live long enough, you’ll experience everything.

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I regularly write about the opportunities in cannabis. But I also want to emphasize the big profits that await you in crypto.

Read This Story: Cannabis and Crypto: The “Disruptive Duo”

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John Persinos is the editorial director of Investing Daily.

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