By John Foley

As the cannabis industry awaits the potential rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act, operators and financial institutions alike are preparing for significant changes. While this shift promises to enhance the financial standing of cannabis companies, it is important to note that the change won’t eliminate all challenges—particularly those tied to regulatory compliance.

This potential regulatory shift will undoubtedly provide financial relief to cannabis businesses, but compliance with state and federal regulations will remain a critical focus for both lenders and cannabis operators as they navigate the evolving landscape of cannabis banking.

Rescheduling’s Positive Impact on Cannabis Creditworthiness

The most significant financial impact of cannabis rescheduling lies in the removal of Section 280E of the Internal Revenue Code. Currently, Section 280E prevents cannabis companies from deducting ordinary business expenses due to the substance’s Schedule I classification, leading to extremely high effective tax rates—sometimes exceeding 70%. The removal of this section would dramatically improve after-tax cash flow for cannabis businesses, making them more financially viable.

By eliminating 280E, cannabis companies would be able to retain more of their earnings. This increased cash flow could be reinvested in operations, expansion or used to reduce debt. In turn, stronger cash flow would improve balance sheets, lowering debt obligations and providing a more stable financial outlook for the industry as a whole. These changes will likely make cannabis businesses more attractive to lenders, opening the door for more favorable loan terms and financial products.

The elimination of 280E would also improve the financial transparency of cannabis businesses. Without the need to use aggressive tax strategies to offset non-deductible expenses, cannabis companies would be able to present more straightforward, reliable financial reports, giving lenders and investors clearer insights into their profitability. This transparency would help investors and financial institutions better evaluate the long-term sustainability of cannabis operators, improving access to financing.

Compliance Challenges Will Persist

However, despite the financial benefits of rescheduling, compliance challenges are expected to remain a significant concern. Even if cannabis is rescheduled to Schedule III, it will still be illegal at the federal level, leaving the industry in a state of legal limbo. This continued federal-state conflict means that financial institutions must remain cautious, continuing to navigate the complexities of cannabis banking.

One key challenge is that the cannabis industry is still classified as “high risk” by financial regulators. This classification necessitates strict adherence to compliance requirements, including enhanced due diligence and risk assessments. Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations will remain in place, requiring lenders to implement robust compliance frameworks to mitigate the risks associated with serving cannabis clients.

In addition to federal compliance, state regulations continue to vary widely, further complicating the landscape for cannabis operators and financial institutions. Each state maintains its own regulatory framework and rescheduling won’t simplify these complex, evolving requirements. Financial institutions that serve cannabis businesses will need to remain vigilant, ensuring they stay up-to-date on each state’s specific regulations to avoid penalties or reputational risks.

Complicating the picture even further is the possibility of evolving guidance from federal agencies and divisions such as FinCEN. While rescheduling could prompt new regulatory guidelines, it is unlikely to fully resolve the legal uncertainties surrounding cannabis banking. Financial institutions must stay agile, ready to adapt to changes in the regulatory environment as they arise.

The Role of Compliance in the New Financial Landscape

In this environment, compliance expertise will be as critical as ever. Financial institutions will need to maintain strong compliance programs to ensure that they can continue to safely engage with cannabis businesses, even as financial prospects improve.

For cannabis businesses, working with financial institutions that prioritize compliance will be key to accessing a wider range of financial services, including loans and credit lines. A comprehensive compliance framework not only opens the door to better financial products but also helps businesses manage their newfound cash flow, ensuring long-term growth and financial stability.

While the rescheduling of cannabis from Schedule I to Schedule III represents a significant milestone for the industry, it is not a cure-all for the challenges that cannabis businesses and financial institutions face. While rescheduling will improve the financial standing and creditworthiness of cannabis companies, it won’t erase the complexities tied to legal compliance.

For financial institutions, entering the cannabis market or expanding their footprint will require investing in compliance systems that can keep pace with evolving regulations. Cannabis operators, meanwhile, will benefit from the financial relief brought by rescheduling but must continue to prioritize compliance to maintain access to critical financial services.

In this new chapter of cannabis banking, businesses that invest in compliance and stay flexible in navigating regulations will be best positioned to capitalize on the opportunities that rescheduling will bring.