Cannabis Investors Need to Look Into QSBS
Those looking to break into the growing cannabis industry through entrepreneurship would be wise to familiarize themselves with section 1202 of the IRC, the capital gains exclusion which allows for holders of QSBS to take the $10,000,000 tax-free.
The cannabis industry attracts many business owners and investors who make their money on the founding, growing, and sale of successful small businesses. Increasing the incentive to attract others boils down, in large part, to maximizing possible returns.
While the IRC 280E denies deductions and credits to cannabis businesses given both the TCJA of 2018 and section 1202 of the IRC (which outlines QSBS), structuring a new cannabis business to meet these criteria can prove to be quite profitable.
Criteria to Consider for Your New Cannabis Business
The business must be structured as a domestic C corporation. As an additional benefit to this structure, under TCJA and its proposed permanent tax cuts, a C corporation will face a maximum 21% tax rate, as opposed to the previous 35%.
The business must have no more than $50 million of gross assets at the time of issuance of the stock. Only stock issued before this threshold is surpassed will be considered QSBS and reap the associated benefits and favorable tax treatment.
The business must use 80% of its assets to participate in an active trade. Excluded trades and businesses are outlined in detail in section 1202 of the IRC.
If all of the criteria are met, then any stock issued by the owner after August 10, 1993, to an individual or entity other than a C corporation, and held for 5 years or more, will be subject to a 50%, 75%, or even 100% exclusion of capital gains on taxable income up to $10 million.
Looking for specific advice on QSBS and Capital Gains? Contact us to learn more.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.