Cannabis Companies Can Save Millions With One Tax Code Section

Cannabis companies that properly tailor structures to their specific operations can maximize their Section 1202 tax benefits and potentially save millions in taxes, say Greenberg Glusker's Zachary M. Nolan and Michelle Mabugat.

The burgeoning cannabis sector can reap significant tax advantages by using the qualified small business stock rules in Section 1202 of the tax code, which allows investors to exclude the greater of $10 million or 10 times their basis in the stock. But cannabis investors must navigate several uncertainties if they want to pursue them.

The first uncertainty is Section 280E, which denies any "deduction or credit" for cannabis businesses. Considering Section 1202 provides an exclusion, which is neither a deduction nor a credit, Section 280E shouldn't affect a cannabis company's ability to claim an exclusion under Section 1202 based on a plain reading of the statute. This position isn't free from doubt, however, as there is no guidance on this issue.