Officials unsure when marijuana rescheduling goes into effect

Mark Hendren: Rescheduling should provide significant tax relief for marijuana companies.

Chip Sheppard is hopeful federal government doesn't put executive order on back burner

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The executive order signed last month by President Donald Trump to reschedule marijuana is expected to eventually benefit businesses operating in the industry. However, the timeline for the federal government to act on the order remains murky, industry officials say.

Trump’s order, which he signed Dec. 18, directs Attorney General Pam Bondi to “take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III” of the Controlled Substances Act “in the most expeditious manner” in accordance with federal law. Marijuana is currently controlled under Schedule I of the CSA.

Schedule I drugs are defined as drugs with no currently accepted medical use, a high potential for abuse and a lack of accepted safety for use of the drug under medical supervision. Schedule III drugs are classified as having a potential for abuse less than the drugs or other substances in Schedules I and II, a currently accepted medical use in treatment in the U.S., and a potential for moderate or low physical dependence or high psychological dependence in the event of drug abuse. Other examples of Schedule III drugs include anabolic steroids, ketamine and testosterone, according to the U.S. Drug Enforcement Administration.

Although the order doesn’t change federal law, which prohibits marijuana from being sold or transported across state lines, it’s a beneficial decision to Missouri businesses working in the weed industry, said Mark Hendren, president of Humansville-based Flora Farms LLC.

Hendren, who said his vertically-integrated company operates 12 dispensaries in the state, was slightly surprised by the presidential order.

“There have been conversations in the previous administration and this administration about rescheduling, but it kind of just faded from the spotlight,” he said. “And then we started hearing rumblings about a week before the order that something was coming and lo and behold, there it was.”

Trump’s order noted 40 states, including Missouri, as well as the District of Columbia, have state- or locally-sanctioned medical marijuana programs. It also pointed out that the U.S. Food and Drug Administration completed a review of the medical use of marijuana in 2023 and “found scientific support for its use to treat anorexia related to a medical condition, nausea and vomiting, and pain.”

Hendren said the order will provide marijuana companies some tax relief and recognize medicinal benefits provided by its products.

“That allows more research; that allows more investigation into all the things that cannabis can do, just like any other potential medicinal product on the market,” he said. “What it does for us as cannabis operators is it allows us to run our accounting and tax part of our business just like every other legal business.”

Andrew Mullins, executive director of the Missouri Cannabis Trade Association, said in a news release that marijuana has been listed as a Schedule I drug since 1970, along with heroin, LSD and ecstasy because the federal government previously determined that there were no currently accepted medical uses for cannabis.

“Federal rescheduling of cannabis removes barriers and creates opportunity for the 40 U.S. states, including Missouri, that have legalized medical and/or adult-use cannabis,” he said in the release. “And no other state in the country is as well positioned as Missouri to take advantage of this reform, while continuing to bring our customers 100% Missouri-grown plant medicine in a safe, compliant way.”

Tax savings
Chip Sheppard, attorney and chair of cannabis and marijuana law group at Carnahan Evans PC, said the reclassification could be “huge tax savings,” especially for dispensaries. Those businesses could now be taxed the same as any other retail business instead of paying taxes on gross profit.

“Right now, a dispensary can only write off its cost of goods sold, so it can only write off the cost it pays for the marijuana that it buys from a cultivator or a manufacturer and a transportation cost,” he said, noting everything else, including insurance, leases, employee costs, utilities and security, have been irrelevant for tax purposes at dispensaries.

Hendren agreed the reclassification should significantly help his company with federal taxes.

“Prior to this, essentially cannabis companies could not take deductions for what are ordinary business expenses that every other legal business gets to deduct before they pay their taxes. I don’t like to talk a lot about financials, but it’s a significant amount of money,” he said, estimating the tax savings could be in the seven figures annually for Flora Farms. He declined to disclose annual company revenue.

Regarding deducting some business expenses, it will be similar to what marijuana companies in Missouri were allowed to do upon the November 2022 passage of Amendment 3 in the state.

Amendment 3, in part, allowed for a business expense subtraction for tax years 2022 and forward, according to the Missouri Department of Revenue. Prior to state voters approving Amendment 3, marijuana companies were prohibited from deducting business expenses on their tax returns.

Flora Farms officials estimated in early 2023 the state tax change would result in roughly 25%-30% of additional costs now deductible for a dispensary, according to past Springfield Business Journal reporting.

“On the state income tax level, we have been able to deduct ordinary business expenses,” Hendren said, declining to estimate the annual tax savings. “But as I’m sure you know, the bulk of the taxes we pay are federal.”

As for when the rescheduling will be enacted, Sheppard said he’s “pretty optimistic” it will occur in the first half of the year, possibly as early as March.

“There’s just so many things that could affect the importance of it just compared to other agenda items of this administration,” he said. “You just hope it doesn’t get put on a back burner because he clearly said in the executive order, this needs to be a top priority of the Justice Department to make this happen quick.”