Explainer-How US change on marijuana would help cannabis companies

By Mrinalika Roy

(Reuters) - The U.S. Justice Department is moving to make marijuana use a less serious federal crime with a proposal to reclassify the drug as on par with Tylenol with codeine, rather than heroin, according to sources.

Here are some ways those changes will affect business.

WHAT DOES RESCHEDULING ENTAIL?

Under the Controlled Substances Act, marijuana is listed as a schedule one substance, meaning it has a high potential for abuse and no current accepted medical use.

The Department of Justice, which oversees the Drug Enforcement Administration, recommended that cannabis be classified as a so-called schedule three drug, with a moderate to low potential for physical and psychological dependence.

WHAT COMES NEXT?

According to TD Cowen analysts, a review of the proposal by the Office of Management and Budget will probably last until late May or June. Then the proposal would be published in June or July in the Federal Register and a comment period held.

DEA then must study the comments, and it also has to hold a hearing before an administrative judge.

WHAT WOULD BE THE TAX IMPLICATIONS?

One of the biggest benefits for cannabis firms would be that they would no longer be subject to Section 280E of the U.S. federal tax code. That provision prevents businesses dealing in schedule one and two controlled substances from claiming tax credits and deductions for business expenses.

The tax change would put close to $3.5 billion of cash back into the sector, which will lower the overall cost of capital for the industry, and spark a flurry of M&A activity, said Katan Associates International founder Seth Yakatan.

(Reporting by Mrinalika Roy in Bengaluru; Editing by Cynthia Osterman)