Cannabis businesses use employee stock ownership to skirt 280E

When Maryland Gov.Wes Moore signed a law on April 22 exempting employee stock ownership plans (ESOPs) from the state’s strict five-year license-hold requirement for cannabis businesses, he opened up an exit strategy for founders.

He also created a strategy that enables marijuana companies to bypass Section 280E of the Internal Revenue Code. ADVERTISEMENT ESOPs are a tool that cannabis businesses in other states have been taking advantage of since about 2023, when Massachusetts-based Theory Wellness put its program into place.

Another Massachusetts cannabis company – The Vault – followed a few days later.“An ESOP is just another way to sell your company,” said Darren Gleeman, managing partner of New York-headquartered ESOP investment bank MBO Ventures, who worked with both companies on their deals.

“You can sell to a private equity firm, a strategic buyer or to employees via an ESOP.” An ESOP transaction allows owners to sell their company stock to an ESOP trust, deferring capital gains taxes on the proceeds. The trust holds the stock for the benefit of the company’s employees.Funding for the deals can come from existing cash, external loans or seller financing.

The company’s tax savings can be used to repay the debt.Avoiding marijuana taxes isn’t only benefit In addition to giving founders an exit plan, Gleeman said, ESOPs allow a marijuana company to keep more of its profits because it doesn’t have to pay income taxes, rendering 280E irrelevant.

But tax relief isn’t the only motivation for cannabis companies to create an ESOP.When Meg Sanders and Erik Williams started Massachusetts-based Canna Provisions, they wanted to incentivize their employees through a profit-sharing plan.

But they discovered that Massachusetts’ ownership regulations made it difficult.While attending a conference in 2023, Sanders learned that ESOPs could be a solution.

“We got very comfortable with it v...