Cannabis operators across Missouri and nationwide are waiting for the IRS to clarify whether they can begin claiming standard business deductions, months after federal regulators recommended moving marijuana to Schedule III.
The uncertainty stems from Section 280E of the tax code, which bars businesses trafficking Schedule I or II substances from deducting normal expenses like payroll, rent, and utilities. If marijuana moves to Schedule III as the DEA proposed in April, that prohibition would lift. But without formal IRS guidance, accountants and operators don't know when they can start taking those deductions.
"They're all very anxious to see if relief is on the way and if we're going to see that guidance from the IRS that basically directs what they can do," said one tax advisor working with Missouri dispensaries.
The Tax Burden
Section 280E has long been the industry's most punishing financial burden. While traditional retailers might pay 20-30% effective tax rates, cannabis businesses often face rates exceeding 70% because they can only deduct cost of goods sold.
A Missouri dispensary generating $5 million in annual revenue might owe $2 million in federal taxes under 280E, compared to perhaps $800,000 if it could claim standard deductions. That difference determines whether operators can expand, hire more staff, or simply survive.
The rescheduling process began when President Biden directed HHS to review marijuana's classification in 2022. HHS recommended Schedule III in August 2023, and the DEA formally proposed the change in May 2024. Public comment periods have closed, but the agency hasn't issued a final rule.
What Accountants Are Telling Clients
Tax professionals face a dilemma. If rescheduling happens mid-year, does relief apply retroactively to January 1? Can businesses amend prior returns? The IRS hasn't said.
Some advisors are telling clients to prepare two versions of their 2024 tax filings: one under current 280E rules, another assuming Schedule III takes effect. That means double the accounting work without knowing which version to file.
Missouri's cannabis market generated $1.1 billion in sales in 2023, its first full year of adult-use operations. The state has roughly 380 dispensaries and 90 cultivation facilities, most operating as small businesses with tight margins.
Industry Response
National operators are equally frustrated. Multi-state companies have told investors they're budgeting for 280E compliance through at least mid-2025, despite hoping for earlier relief.
The Cannabis Business Association has called on Treasury Secretary Janet Yellen to issue interim guidance, even if the DEA's final rule is pending. Trade groups argue operators need clarity to make hiring and expansion decisions.
But federal agencies rarely coordinate that way. The IRS typically waits for the DEA to finalize scheduling changes before updating tax policy.
What Happens Next
The DEA could issue its final rescheduling rule anytime between now and early 2025. Once published, it would likely take effect 60-90 days later. The IRS would then need to clarify the tax implications, a process that could take additional months.
That timeline means many operators won't see relief until their 2025 tax year, even if rescheduling happens soon. And if legal challenges delay implementation, the wait could stretch longer.
For Missouri businesses that just started paying state licensing fees and navigating adult-use regulations, the federal tax uncertainty adds another layer of complexity. Some operators say they're holding off on new store leases or equipment purchases until they know their true tax liability.
The industry has operated under 280E since the 1980s, when the provision was created to penalize drug traffickers. Its application to state-legal cannabis businesses has been controversial, but courts have consistently upheld it. Only a scheduling change or congressional action can provide relief.
This article is based on original reporting by www.marijuanamoment.net.
