10 top tax issues in cannabis operating agreements – Cannabis Business Executive

Members of CohnReznick’s Cannabis team recently participated in a webinar with New Frontier Data and NFP titled “Industry Outlook: The Cannabis Commercial Landscape in 2021 and Beyond.” We were excited to see many insightful questions from the attendees, many of which concerned entity structure and issues we have encountered with operating agreements. In our experience, most new cannabis operators face a number of common issues. Read on for a summary of the top ones to consider.

• Plant-touching vs. ancillary businesses 
  • We generally recommend that clients set up separate legal entities for plant-touching and non-plant-touching operations. These should be separate businesses in form and substance. Commingling of funds, intercompany transactions, or interdependence could lead to IRS challenges if the taxpayer argues that the ancillary business is not subject to Internal Revenue Code (IRC) Section 280E.
• Partnership vs. corporate taxation
  • Most operators utilize an LLC for their initial legal structure. A multi-owner LLC is by default generally treated as a partnership but can elect to be treated as a corporation for federal income tax reporting purposes.
  • We generally recommend to stay treated as a partnership for income tax purposes, and as such the remainder of this summary focuses on partnership tax issues. However, there are some situations in which electing to be taxed as a corporation is beneficial for tax purposes. Therefore, it is critical that operators consider both the federal and state tax impact of entity selection. [Read More @ Cohn Reznick]