Understand the Impacts of the Proposed Marijuana Reclassification

On May 21, 2024, the Department of Justice (DOJ) proposed a rule which, if enacted, would “transfer marijuana from schedule I of the Controlled Substances Act (CSA) to schedule III of the CSA.”¹ Before the rule can be enacted, a 60 day comment period is given to allow members of the public to voice their opinion on the proposed rule. The comment period closes on July 22, 2024. This memorandum will discuss the proposed rule, explain its potential impacts, and describe the process of submitting a comment.

The Proposed Rule

Marijuana was placed in schedule I when the CSA was created in 1970. Interested parties have petitioned to reschedule the drug numerous times over the years, most recently in 2016. Examples of other drugs included in Schedule I are heroin and LSD.

Since 1996, 38 states, the District of Columbia, and four federal territories have legalized medical marijuana. In light of recent research, the Department of Health and Human Services (HHS) recommended in August of 2023 that marijuana be rescheduled from schedule I to schedule III. Schedule III includes many stimulants and depressants, pain-killers and cough suppressants, and anabolic steroids.

The three factors that are considered when determining a drug’s schedule are (1) the drug’s potential for abuse, (2) whether the drug has a currently acceptable medical use (CAMU) in treatment in the United States, and (3) whether there is a lack of accepted safety for use of the drug under medical supervision or the level of physical or psychological dependence that could result from abuse of the drug. Schedule I drugs have a high potential for abuse, no CAMU, and a lack of accepted safety for use under medical supervision. Schedule III drugs have a lower potential for abuse when compared to drugs in schedules I and II, have a CAMU, and their abuse may lead to moderate or low physical dependence or high psychological dependence.

HHS found that marijuana better fit the definition of schedule III than of schedule I. The potential for abuse of marijuana is less than that of other schedule I and II drugs. Additionally, marijuana currently has an acceptable medical use as a treatment for anorexia related to a medical condition, nausea and vomiting, and pain. Finally, the abuse of marijuana has been found to lead to moderate or low physical dependence.

Based on the recommendation from HHS, the DOJ proposed this rule which would reclassify marijuana as a Schedule III drug. The rescheduling would apply to all marijuana that meets the statutory definition but would not apply to synthetically derived THC, which would remain in schedule I. Regardless of its schedule, marijuana would still be criminalized at the federal level.

Some have called for marijuana to be declassified, meaning it would not be listed on any of the five schedules and would be treated similarly to alcohol or tobacco. While some members of the Senate have shown support for this approach, the current proposed rule does not address that possibility.

Impact on the Cannabis Industry

The reclassification of marijuana from a schedule I drug to a schedule III drug could have various impacts on the cannabis industry.

Deduction of Business Expenses

Federal law states that businesses that sell schedule I or schedule II drugs are not allowed to deduct business expenses on their federal tax returns.² If marijuana is reclassified as a schedule III drug, cannabis businesses would be able to take advantage of deducting business expenses. This would result in a lower effective tax rate for those businesses, which should increase overall profitability and could make investment in cannabis businesses more attractive.

Similarly, increased profitability due to a lower effective tax rate may result in a higher sale price in the event a cannabis business is sold to a third party. Owners of cannabis companies who are contemplating a sale of their business should be mindful of potential tax consequences resulting from that future sale. In particular, cannabis companies taxed as a C-corporation will likely be subject to a higher effective tax rate on proceeds from a sale of the company. To minimize this unfavorable tax consequence, owners of cannabis businesses should consider making an election to be taxed as a partnership or an S-corporation. Such an election could result in significant tax savings on the sale proceeds for some owners. Owners of cannabis companies taxed as a C-corporation should consider this election before the proposed rule is enacted. This allows future increases in the value of the company to be taxed in the most advantageous manner. This determination is complex and specific to each business owner. A Rhoades McKee attorney can assist you in determining whether making an election to be taxed as a partnership or an S-corporation is in your best interest.

Bankruptcy

The bankruptcy code generally forbids the use of the bankruptcy system in the service of an illegal enterprise. This means that cannabis business owners usually cannot bring a successful case for bankruptcy when times get tough. Since this proposed rule does not decriminalize marijuana at the federal level, the reclassification of marijuana as a schedule III drug would not make bankruptcy relief any easier to access for cannabis businesses.

Impact on Other Industries

The cannabis industry would not be the only industry impacted by the proposed reclassification of marijuana.

Research Industry

Researching drugs of any schedule can be difficult. With marijuana classified as a schedule I drug, medical researchers have a lot of hoops to jump through. The research protocols are expensive and burdensome. Reclassifying marijuana would not eliminate all barriers to research but would make the process somewhat easier. If classified as a schedule III drug, protocols regarding the storage and security of the drug during research would be more manageable. Regardless of its schedule, so long as marijuana is listed as a controlled substance, it can only be studied as a therapeutic product and not as a recreational product.

Banking System

Reclassifying marijuana as a schedule III drug would not have a direct impact on a cannabis business’s ability to access federally regulated financial institutions. However, a bill has been introduced in Congress called the Secure And Fair Enforcement Regulation (SAFER) Banking Act. If this bill passes through Congress and becomes law, it would “provide protections for federally regulated financial institutions that serve state-sanctioned marijuana businesses.”³ This means that federally regulated financial institutions would be able to provide banking services to marijuana businesses in states where marijuana has been legalized without fear of being penalized.

Submitting a Comment on the Proposed Rule

As previously mentioned, the comment period for this proposed rule is currently open and will close on July 22, 2024. Comments can be made by visiting the Federal Register at https://www.regulations.gov/commenton/DEA-2024-0059-0001. Comments will be reviewed by the Department of Justice. The DOJ and the Drug Enforcement Administration (DEA) will consider these comments, along with scientific data, expert opinions, and various facts when deciding whether or not to move forward with the proposed rule.

Rhoades McKee’s Cannabis Legal Services Team is a cross-disciplinary group of attorneys who focus on helping our clients navigate the interplay of state and federal regulations impacting their businesses, from licensing to growing, dispensing, and intellectual property issues. Whether you are involved directly in the cannabis production or retail industries or are looking for help dealing with how cannabis impacts your business, we are available to answer any questions you have about state and federal data laws, rules, and regulations.

This alert was drafted with the assistance of Rhoades McKee 2024 Summer Associate, Claire Thiel (Indiana University Maurer School of Law, J.D. Candidate, 2025).

¹Schedules of Controlled Substances: Rescheduling of Marijuana: https://www.federalregister.gov/documents/2024/05/21/2024-11137/schedules-of-controlled-substances-rescheduling-of-marijuana

²26 U.S. Code § 280E

³S.2860 – SAFER Banking Act: https://www.congress.gov/bill/118th-congress/senate-bill/2860