What Does Rescheduling and Descheduling Cannabis on Accounting and Taxes for Cannabis Companies
The regulatory status of cannabis in the United States has significant implications for businesses operating in the cannabis industry, particularly in terms of accounting and taxes. This article explores the difference between rescheduling and descheduling cannabis by the DEA and delves into the potential ramifications for accounting practices and tax obligations within the cannabis sector.
Rescheduling vs. Descheduling: Understanding the Basics:
Rescheduling: Currently, cannabis is classified as a Schedule I controlled substance by the DEA, indicating a high potential for abuse and a lack of accepted medical use. Rescheduling would involve reclassifying cannabis to a different schedule, potentially recognizing its medical benefits.
Descheduling: Descheduling, on the other hand, involves removing cannabis from the controlled substances list entirely. This would signify a federal acknowledgment that cannabis does not belong in the same category as substances like heroin and LSD.
Impact on Accounting:
Access to Traditional Banking: Rescheduling or descheduling could improve access to traditional banking services for cannabis companies. Currently, many operate in a cash-intensive environment due to limited banking options, impacting their ability to maintain transparent financial records.
Financial Reporting Standards: A change in cannabis’s legal status could influence financial reporting standards. Companies may need to adapt their accounting practices to comply with new regulations, potentially affecting valuation methods and financial disclosures.
Tax Implications:
Section 280E: The Internal Revenue Code’s Section 280E currently prohibits cannabis companies from deducting ordinary business expenses for income tax purposes. Rescheduling or descheduling could lead to potential changes in tax regulations, impacting the applicability of Section 280E.
Tax Credits and Deductions: A shift in the legal status of cannabis could open avenues for tax credits and deductions that were previously unavailable. Businesses may be eligible for research and development credits or deductions related to operating expenses.
Challenges and Considerations:
State vs. Federal Discrepancies: Despite potential changes at the federal level, discrepancies between state and federal regulations may persist. Cannabis companies operating in states where it is legal must navigate these complexities, impacting their accounting and tax strategies.
Timing and Uncertainty: The timing of any rescheduling or descheduling is uncertain and depends on legislative and regulatory actions. Businesses must stay informed and be prepared to adapt quickly to changes.
Conclusion: The potential rescheduling or descheduling of cannabis by the DEA holds promise for the cannabis industry, particularly concerning accounting practices and tax obligations. While improved access to banking and changes in tax regulations are on the horizon, businesses must remain vigilant, staying abreast of legal developments and proactively adjusting their financial strategies to align with the evolving landscape.
Note: This article is based on the regulatory environment as of the last knowledge update in January 2022, and there may have been subsequent developments.
Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.
