Marijuana rescheduling will make pot businesses ‘significantly more profitable’

The federal government is removing some barriers to Minnesota’s budding marijuana industry by reclassifying the drug as less dangerous.

If the decision to move marijuana from a Schedule I to a Schedule III controlled substance goes forward as planned, businesses could take advantage of normal tax write-offs, something state-licensed growers and dispensaries around the country are unable to do under current IRS rules.

That will add up to millions in savings for Minnesota cannabis businesses, removing a major barrier to profitability and potentially opening the door to more would-be cannabis entrepreneurs.

“Business owners and soon-to-be business owners are facing so many hurdles already that this feels like a shot in the arm, and it’s something we can point to and say, ‘Relief is on the way,’” said Mark Waller, a Minneapolis accountant who works with cannabis businesses.

Since states started legalizing marijuana a decade ago, businesses have had to work around the drug’s continuing federal prohibition. That has meant a lot of cash-only businesses, thin profit margins and high-interest financing, when loans or investment are available at all.

Despite the tax benefit, the rescheduling doesn’t automatically make it easier for dispensaries and greenhouses to get loans or accept debit and credit cards, since marijuana will still be a federally controlled substance.

National cannabis law firm Vicente LLP says the move could signal a shift in federal policy that makes lenders and card processors like Visa and MasterCard more comfortable taking the risk of getting into the pot business, however.

“Schedule III sends a message reinforcing the current reality that the federal government is not interested in prosecuting groups that work with state-licensed marijuana businesses,” Vicente attorneys wrote in an analysis of the rescheduling move Tuesday. “The elimination of [IRS Code] 280E will make marijuana companies significantly more profitable. This reduces the financial risk for bank lenders and, as such, should increase the availability of financing.”

Waller said businesses can expect to save tens of thousands of dollars a year on taxes, but any banking benefits could take much longer to materialize.

“Anybody who is going to start a marijuana business in Minnesota is still going to need a lot of cash up front,” he said, but added: “It’s a little easier to say to the dreamers that there is a little more opportunity.”

Leili Fatehi, who advocated for legalizing adult-use cannabis in Minnesota, said policies are still needed to “prioritize social equity and justice, ensuring that the benefits of cannabis legalization are accessible to all communities.”

“While rescheduling opens doors for medical research and economic development, it’s essential to acknowledge that it’s just the beginning,” she said.

Minneapolis cannabis attorney Jason Tarasek said full federal legalization remains the goal, but the Drug Enforcement Agency’s move is a welcome step forward for the industry.

“Rescheduling eliminates the 280E tax penalty and immediately makes every adult-use cannabis business much more profitable,” he said. “Hopefully, this will lead to banking reform for cannabis businesses and other federal changes that are long overdue.”

Star Tribune staff writer Matt DeLong contributed to this story.