DEA Rescheduling: Recommendations for the U.S. Senate Finance Committee

Cannabis rescheduling hearings are set to begin on January 21, 2025. If successful, rescheduling will usher in multiple positive impacts on the success and viability of the industry—the most immediate (and perhaps most impactful) will be the removal of Internal Revenue Code Section 280E. AAFCPAs’ expertise was recently sought by the U.S. Treasury and Senate Finance Committee for guidance on critical considerations regarding the 280E transition following DEA rescheduling news.

Rescheduling marks an important step toward aligning federal and state cannabis policies, which frequently conflict. In states where cannabis has been legalized, businesses still navigate federal tax regulations. By potentially redefining the application of 280E, the rescheduling decision opens the door for cannabis operators to find some relief from burdensome tax restrictions. AAFCPAs is working to ensure that any regulatory changes support the financial health and growth of the cannabis industry. As a key advisor through the AICPA, AAFCPAs continues to provide insights as needed to shape regulatory guidance on this issue. We advise that cannabis clients stay abreast on potential regulatory changes, so they may better prepare and assess how developments could affect their tax and financial strategies.

AAFCPAs’ Recommendations on 280E Transition

The following outlines some of our recommendations to the Senate Finance Committee, formalized in a public letter to the U.S. Treasury.

• Effective Date for 280E Changes. AAFCPAs recommends implementing any changes to 280E retroactively to the beginning of the year if rescheduling occurs mid-year. A start date aligned with the beginning of the year avoids mid-year compliance complications, provides businesses adequate transition time, and follows the precedent set by prior regulatory changes by states that have decoupled from 280E.
• Uniform Tax Treatment for Medical and Recreational Cannabis. To maintain consistency, AAFCPAs advises that 280E adjustments apply equally to both medical and recreational cannabis. This uniformity simplifies compliance for operators, reduces administrative burden, and supports the legal market by discouraging consumers from seeking untested products on the illegal market.
• Excessive Excise Taxes to Replace 280E. AAFCPAs cautions against excessive excise taxes. Instead, we suggest implementing a low, gradually increasing rate benchmarked against alcohol and tobacco taxes. This approach would help maintain consumer accessibility to legal cannabis and stabilize the industry’s growth without pushing consumers (back) toward illegal markets.
• Current Tax Burden and Broader Industry Impact. With cannabis operators facing effective tax rates as high as 70 to 80 percent, AAFCPAs emphasizes the need to normalize cannabis taxation. High tax rates hinder cash flow and strain small businesses, ultimately predominantly affecting social equity initiatives in the industry.
• Other Considerations. Additionally, AAFCPAs encourages the committee to consider related issues including banking laws and interstate commerce, as these remain critical to the cannabis sector’s long-term viability.

Advance Your Operations

If you have questions, please contact David McManus, CPA, CGMA, Tax Partner & Cannabis Practice Leader at 774.512.4014 or dmcmanus@aafcpa.com—or your AAFCPAs Partner.