Republican Senators Introduce Legislation to Keep Cannabis Businesses from Claiming Tax Deductions Even If Rescheduled

A new legislative proposal spearheaded by U.S. Sens. James Lankford and Pete Ricketts aims to ensure that cannabis businesses remain subject to harsh federal tax burdens, even if marijuana is reclassified as a Schedule III substance under federal law. The bill, known as the “No Deductions for Marijuana Businesses Act,” seeks to permanently block cannabis operators from deducting ordinary business expenses, a benefit that other legal businesses enjoy under the U.S. tax code.

This move represents a direct challenge to the potential tax relief that cannabis companies could receive if the Biden administration’s rescheduling proposal is finalized. The legislation reflects ongoing opposition to the cannabis industry from prohibitionist groups and lawmakers who continue to push back against federal cannabis reform efforts.

Federal Tax Law Has Historically Penalized Cannabis Businesses and Other Schedule I and II Drug Operators

Under the existing tax code, Section 280E of the Internal Revenue Code prevents businesses that deal in Schedule I or Schedule II substances from deducting basic business expenses such as payroll, rent, and utilities. This provision was enacted in 1982 as part of the Tax Equity and Fiscal Responsibility Act and was originally designed to target illegal drug traffickers. However, because cannabis remains federally classified as a Schedule I drug, licensed businesses operating in legal state markets are still subject to these tax penalties.

The result is that cannabis businesses—some of the fastest-growing in the U.S.—are forced to pay significantly higher taxes than companies in other industries. For some of the largest cannabis operators, this means paying more than $100 million annually in federal taxes that they would not owe if cannabis were classified differently.

The Biden administration’s Department of Health and Human Services (HHS) recommended that marijuana be moved to Schedule III, a category that includes substances with recognized medical value. If reclassified, cannabis businesses would no longer be subject to 280E, enabling them to claim standard business deductions and improve their financial sustainability.

Newly Proposed Legislation Would Keep Section 280E in Place Regardless of Federal Rescheduling Efforts

Despite the potential benefits of rescheduling, Sens. Lankford and Ricketts introduced their legislation on Feb. 6, aiming to prevent cannabis businesses from receiving tax relief. Their bill proposes extending Section 280E restrictions beyond Schedule I and II substances, ensuring that marijuana businesses would remain ineligible for standard tax deductions even if cannabis is reclassified under Schedule III, IV, or V.

This effort is being supported by Smart Approaches to Marijuana (SAM), a well-known prohibitionist group that has consistently fought against cannabis legalization efforts across the country. The organization has publicly praised the senators for introducing the bill, arguing that cannabis companies should not receive what they call “federal tax breaks” because marijuana remains illegal under federal law.

Cannabis Industry Leaders Say the Bill Ignores Economic Reality and Threatens Business Viability

Industry experts and cannabis business owners argue that this legislative effort is another attempt to stifle the industry and create financial roadblocks for legal operators. Unlike other sectors, cannabis businesses already struggle with profitability due to high taxes, complex regulations, and limited access to banking services.

According to a 2024 report from Whitney Economics, only 27.3% of U.S. cannabis businesses were profitable, compared to 65.3% of small businesses across all industries. Without the ability to deduct standard expenses, many cannabis operators face higher-than-normal tax burdens that significantly impact their bottom line.

If cannabis is reclassified but the new legislation passes, marijuana businesses would remain trapped in a unique financial disadvantage. In contrast, pharmaceutical companies producing drugs under Schedule III, such as anabolic steroids and ketamine, are allowed to deduct business expenses like any other legal industry.

Legislative Opposition to Federal Cannabis Reform Has Intensified in Recent Months

The introduction of the “No Deductions for Marijuana Businesses Act” is just the latest move in a broader campaign by some lawmakers to prevent cannabis reform. In July 2024, Sen. Lankford and Rep. Pete Sessions led a coalition of 25 Republican lawmakers in a letter to then-Attorney General Merrick Garland, opposing the Department of Justice’s (DOJ) proposal to reclassify cannabis under the Controlled Substances Act (CSA).

In their letter, they argued that the recommendation from the HHS was politically motivated rather than based on scientific evidence. However, the HHS conducted a formal medical evaluation in partnership with the Food and Drug Administration (FDA) before determining that cannabis has accepted medical value and does not belong in Schedule I.

The ongoing resistance to rescheduling is taking place against the backdrop of a shifting political landscape. With the change in White House administration in January 2025, the future of federal cannabis reform remains uncertain.

Political Uncertainty Surrounding Rescheduling Continues as the DOJ’s Proposal Faces Delays

Even though the DOJ had formally proposed rescheduling cannabis under President Biden, the process has stalled due to legal and political challenges. The rescheduling effort was recently delayed when the Drug Enforcement Administration’s (DEA) chief administrative law judge, John J. Mulrooney, granted an interlocutory appeal and referred the matter to the DEA administrator.

On Jan. 15, just days before President Donald Trump took office, the appeal was still under review by the outgoing administration. Following the presidential transition, the new administration appointed Derek S. Maltz as the DEA’s acting administrator, further complicating the process.

Maltz has previously voiced skepticism about the DOJ’s handling of cannabis rescheduling, suggesting that politics had influenced the decision rather than public safety considerations. His appointment raises questions about whether the DEA will ultimately approve or reject the rescheduling recommendation.

Economic and Legal Implications of Restricting Cannabis Businesses from Tax Deductions

If the legislation introduced by Lankford and Ricketts becomes law, the financial burden on cannabis businesses will remain significant, limiting their ability to reinvest in operations, expand their workforce, and compete with illicit market operators.

Many experts warn that maintaining strict tax penalties on legal businesses while allowing the unregulated market to thrive could undermine the goals of cannabis legalization. Instead of eliminating the illicit market, high operational costs and tax burdens on licensed businesses could push consumers toward illegal sellers, where products are neither taxed nor tested for safety.

Some state lawmakers and industry leaders have also argued that tax fairness should be part of any federal cannabis reform effort. The ability to deduct standard business expenses is seen as a critical step in making the legal cannabis industry sustainable and competitive.

What Comes Next for Cannabis Rescheduling and Federal Tax Reform?

The next steps for cannabis rescheduling remain uncertain. With the DEA now leading the review, any final decision will likely be influenced by the policies of the new administration. If the rescheduling proposal is ultimately blocked or delayed, the cannabis industry will continue to face challenges in navigating the federal tax code.

Meanwhile, the “No Deductions for Marijuana Businesses Act” is expected to face significant opposition from lawmakers who support cannabis reform. While it aligns with the views of prohibitionist groups, many members of Congress recognize the economic potential of the legal cannabis industry and may resist efforts to impose further financial restrictions.

As the federal government continues to debate cannabis policy, businesses and industry advocates will be closely watching both the progress of rescheduling and any new legislative developments that could impact taxation and profitability. The battle over cannabis tax policy is far from over, and the outcome could shape the future of the industry for years to come.