As Feds Slow Roll On Cannabis Rescheduling, Senators Try To Stop Potential Tax Breaks

The Uncertain Future of the Legal Cannabis Industry in 2025

The year 2024 was a landmark year for the legal cannabis industry, with record-breaking sales across the United States. However, the industry is now facing uncertainty as the federal government takes steps that could significantly impact its future. Just weeks after the U.S. Drug Enforcement Administration (DEA) signaled a potential slowdown in cannabis rescheduling efforts, two Republican senators introduced a bill aimed at continuing the federal ban on tax deductions for cannabis businesses. These developments suggest that 2025 may bring challenges to the growing cannabis industry.

Rescheduling Cannabis: A Complex and Delayed Process

Cannabis remains a Schedule I drug under federal law, classified alongside substances like heroin and LSD, despite being legalized for medical or recreational use in most states and the District of Columbia. The Biden administration had proposed rescheduling cannabis to Schedule III, which would have placed it in the same category as ketamine and some anabolic steroids. This change would have been the most significant update to cannabis classification in over 50 years.

The DEA published its proposed rule on rescheduling cannabis in May 2024, inviting public comments. Over 43,000 comments were submitted, with 90% in favor of reform. However, the process hit a roadblock in January 2025 when DEA Administrative Law Judge John Mulrooney canceled scheduled hearings without providing a new date. This indefinite delay has left the industry in limbo, with the future of rescheduling uncertain.

What Rescheduling Wouldn’t Do: Clarifying Misconceptions

It’s important to understand that rescheduling cannabis to Schedule III would not legalize or decriminalize it at the federal level. The manufacture, distribution, and possession of cannabis would remain illegal under federal law. Additionally, rescheduling would not resolve the industry’s banking challenges. Since cannabis is still illegal federally, banks are prohibited from providing services to cannabis businesses, forcing the industry to operate on a cash-only basis. This also complicates regulation and taxation efforts.

Taxation of Cannabis: A Historical and Current Perspective

The taxation of cannabis has a complex history tied to its legal status. The 1937 Marihuana Tax Act legalized cannabis but imposed heavy taxes on its sale, leading to its criminalization. This Act was later challenged in the Supreme Court case Leary v. United States, resulting in the Controlled Substances Act of 1970, which criminalized cannabis possession and sale under federal law.

Today, cannabis businesses must report their income to the IRS, even though their operations remain illegal under federal law. Section 280E of the Tax Code disallows deductions for businesses engaged in trafficking controlled substances, significantly increasing tax burdens. Despite some IRS clarifications and memorandums over the years, cannabis businesses can only deduct the cost of goods sold, not other business expenses. This results in effective tax rates of 40% to 70%, creating financial strain for the industry.

The "No Deductions for Marijuana Businesses Act": A New Challenge

In response to the possibility of rescheduling, Senators Pete Ricketts (R-Nebraska) and James Lankford (R-Oklahoma) introduced the "No Deductions for Marijuana Businesses Act" in February 2025. This bill targets cannabis businesses by name, not by Schedule, to prevent them from claiming tax deductions for business expenses. Senator Ricketts argued that the federal government should not subsidize an industry that profits from addiction and undermines public safety.

The bill’s introduction is seen as a direct attack on the economic viability of the cannabis industry. Experts like Darren Gleeman, Managing Partner of MBO Ventures, predict that this move could stifle investment, innovation, and job growth, while inadvertently benefiting the illicit market. Gleeman believes the bill is unlikely to pass due to slim partisan margins in Congress, but the broader implications for the industry remain concerning.

Expert Insights and the Path Forward

Darren Gleeman expressed skepticism about the future of cannabis reform under the current administration, noting that many Trump-appointed officials hold anti-cannabis views. He predicts that the industry will face continued challenges, including high taxes and limited financial relief. Despite these obstacles, Gleeman sees potential solutions, such as Employee Stock Ownership Plans (ESOPs), which could help cannabis businesses navigate financial challenges by reducing taxable income.

Other cannabis companies are exploring alternative strategies, such as transitioning to hemp sales, which are not subject to the same federal restrictions. However, the industry remains vulnerable to declining prices and over-reliance on state tax revenues. Without meaningful federal reform, the legal cannabis industry may face an uncertain and challenging future.