The dominos first began to fall on June 25, 2018, when the U.S. Food and Drug Administration (FDA) approved the first marijuana-based drug for use in the United States. The drug, Epidiolex, contains cannabidiol (CBD), a purified chemical extract of the cannabis sativa plant (i.e., marijuana) as one of its main ingredients. The Controlled Substances Act, as originally written, does not provide for any relief for derivatives of the cannabis sativa plant and thus, the approved drug remained a Schedule I narcotic, even despite its FDA approval… until now.

On Sept. 28, the Acting Administrator of the Drug Enforcement Agency (DEA) issued an official proclamation paving the way for certain CBD-based drugs to be rescheduled from Schedule I to Schedule V should they meet three tests. These conditions are:

1. The drug must be approved by the FDA.
2. The compounds used to create the drug may only contain cannabidiol (CBD) derived from cannabis.
3. And, there may not be higher than .1 percent residual tetrahydrocannabinols (THC) present.

Now, despite the euphoria of those in the cannabis industry that see this as the first step towards federal deregulation, the DEA has provided a very limited scope by which certain cannabis-based drugs are now on Schedule V. Any drug failing to meet the above definition will still be a Schedule I narcotic. In fact, really only Epidiolex meets this criteria today.

So wait… why does any of this matter to a boring tax accountant (i.e., me)?

Well, here's why:

Anyone who has been following the cannabis industry is familiar with Section 280E of the Internal Revenue Code (IRC). This section, created by Congress in 1982, provides that “no deduction or credit shall be allowed for any amount paid or incurred… in carrying on any trade or business if such trade or business consist of trafficking in controlled substances.” What most people do not tend to focus on in this section, is the caveat that “trafficking in controlled substances” is followed in parentheses by “(within the meaning of Schedule I and II of the Controlled Substances Act).” Thus, by providing for an outlet by which drugs derived from the cannabis sativa plant to now be placed on Schedule V instead of Schedule I, the DEA has provided a scenario in which a plant-touching business — sorry, a major pharmaceutical company — can now theoretically disregard IRC §280E when calculating their net taxable income.

Accountants would be wise to keep their eyes on this. If this is the beginning of a trend for the DEA, perhaps all businesses operating within the medical cannabis space may soon be able to claim exemption from IRC §280E. I suppose we will just have to wait and see if this snowflake turns into the avalanche that many hope it will become.