On Thursday, Apr. 23, the U.S. Deptartment of Justice announced through a News Release that Acting Attorney General Todd Blanche has signed AG Order No. 6754-2026 (“Order”) placing “drug products containing marijuana that have been approved by the Food and Drug Administration (FDA) in Schedule III of the Controlled Substances Act (CSA).”
While many states have legalized either medical or recreational use of cannabis, or both, the drug has remained on Schedule I for federal purposes. This is the federal government’s most restrictive classification, sharing space with heroin and LSD.
The Order “applies to marijuana as defined in the CSA, marijuana extracts, and delta-9- tetrahydrocannabinol and other compounds derived from the marijuana plant (other than the mature stalks and seeds) [referred to herein collectively as “cannabis” or “marijuana”] that falls outside the definition of hemp, to the extent that any of these are included in an FDA-approved drug product or are subject to a state-issued license to manufacture, distribute, and/or dispense marijuana or products containing marijuana for medical purposes (“state medical marijuana license”).” The Order also “establishes an expedited registration process under 21 CFR part 1301 for entities holding state medical marijuana licenses, enabling such entities to engage in the manufacture, distribution, and/or dispensing of marijuana for medical purposes under federal law consistent with the requirements of the [United Nations Single Convention on Narcotic Drugs, March 30, 1961, 18 U.S.T. 1407, 520 U.N.T.S. 151 (“Single Convention”)].
The federal income tax effect of the Order is that now state-licensed manufacturers, distributors and dispensaries of medical marijuana can deduct their business operating expenses in addition to their costs of goods sold. As stated in the Order: “state licensees will no longer be subject to the deduction disallowance imposed by Section 280E of the Internal Revenue Code.” Since 1982, the Internal Revenue Code has banned any business that engages in the sale or distribution of any Schedule I or II drug from deducting its operating expenses for income tax purposes. This often resulted in creative accounting, with companies trying to label as much of their expenses as possible as cost of goods sold, which have always been deductible. But there are limits to how much you can include in cost of goods sold, which historically has subjected businesses in the cannabis industry to a higher effective rate on their profits than those who operate outside of it.
Unfortunately for many companies in the industry, the Order does not cover companies that sell marijuana products for state-licensed recreational purposes.
Placing only FDA-approved products containing marijuana and state-licensed marijuana in Schedule III also is consistent with articles 23 and 28 of the Single Convention and 21 CFR 1318.04(b), which specify that the requirement to monopolize the wholesale trade in marijuana does not extend to “medicinal cannabis.” Medicinal cannabis is defined in 21 CFR 1318. 02(b) to mean “a drug product made from the cannabis plant, or derivatives thereof, that can be legally marketed under the Federal Food, Drug, and Cosmetic Act [(FD&C Act)].” The final rule exempts marijuana subject to state medical marijuana licenses from the requirement to monopolize the wholesale trade in marijuana.
Although 40 states have legalized marijuana for medicinal purposes, 24 states and the District of Columbia have also legalized marijuana for recreational use in varying degrees. Companies operating in these jurisdictions may need to reassess their business plans.
Finally, the Order applies to THC derived from the marijuana plant (other than the mature stalks and seeds) that falls outside the definition of hemp, because it meets the statutory definition of marijuana.
What is excluded?
In addition to recreational-use marijuana, the Order excludes:
- Synthetically derived THC
- Tetrahydrocannabinols that can be derived only through a process of artificial synthesis
- Any drug product containing marijuana or THC that previously has been rescheduled out of Schedule I (e.g., Marino! and Syndros)
- Previously scheduled synthetic cannabinoids
Conclusion
While the Order is welcome relief to many growers, distributors and dispensaries due to the ability to now deduct ordinary and necessary business expenses (like virtually every other business in the country), the Order only applies to medicinal use of marijuana and cannabis products. Recreational use is still not covered by Schedule I, so companies in this space may want to reassess their business plans to increase their after-tax profits.
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