Cannabis business owners who plan on growing and selling their companies may want to consider utilizing a sometimes overlooked tax benefit called qualified small business stock, or “QSBS”. IRC §1202 permits an eligible shareholder to potentially exclude up to 100 percent of the gain on the sale of eligible QSBS, which has the potential to significantly reduce or even eliminate capital gains tax owed by the taxpayer.
In order to qualify as QSBS, and thus be eligible for the IRC §1202 exclusion, the stock must satisfy all of the following:
- It must be issued by a domestic C corporation with no more than $50 million of gross assets at the time of and immediately after issuance;
- The corporation must use at least 80 percent of its assets (by value) in an active trade or business, other than in certain personal services and types of businesses;
- The stock must have been issued after August 10, 1993;
- The stock must be owned by an individual or an entity other than a C corporation;
- The stock must have been acquired by the owner on original issuance; and
- The stock must have been held for more than five years.
IRC §280E denies deductions and credits to cannabis businesses. However, if structured correctly the sale of a cannabis business can utilize the benefits of QSBS because IRC §1202 operates to exclude gain from tax recognition, meaning it is neither a deduction or credit. Although the matter is not free from doubt and the Internal Revenue Service has not provided any guidance, we believe that if the cannabis business meets all of the requirements of IRC §1202 it can be eligible for the gain exclusion.
Operating your business as a C corporation has other benefits we are happy to discuss. If you are already operating under an LLC or S corporation, we can discuss a possible reorganization in order to take advantage of QSBS. Our team helps cultivators, retailers, product manufacturers, distributors, and testing facilities, as well as ancillary industry businesses and investors. Our attorneys know the unique risks and challenges facing the cannabis, medical marijuana and hemp sectors, so we take the time to understand our clients’ products and business objectives. Please contact a Greenspoon Marder attorney to evaluate your options for QSBS or other matters.