One of the key provisions of the Tax Cuts and Jobs Act of 2017 was the creation of additional tax incentives for investment in opportunity zones. For those with significant unrealized gains, the potential deferral or elimination of gains permitted with the additional of section 1400Z to the Internal Revenue Code can be a windfall. Given the disfavored income tax treatment of cannabusinesses under I.R.C. § 280E, potential investors may question their eligibility for these new tax incentives. A closer look at the new law, as well as the scope of I.R.C. § 280E, indicates that cannabusinesses should be eligible for the opportunity zone tax incentives.
In order to qualify as a qualified opportunity fund eligible for deferral or elimination of tax on gains, a fund must invest in “qualified” types of property. In order for property to be qualified under I.R.C. § 1400Z-2, it must relate to a “qualified opportunity zone business.” A “qualified opportunity zone business” means a trade or business
(1) in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone property;
(2) which satisfies the requirements of paragraphs (2), (4), and (8) of section 1397C(b), and
is not described in section 144(c)(6)(B). (3) which
I.R.C. § 1400Z-2(d)(3)(A). While the second prong requires generally that property be used in the active conduct of a business (and not be investment-type property), the third prong categorically excludes certain types of businesses from eligibility for the tax incentives relating to opportunity zones. As set forth in I.R.C. § 144(c)(6)(B) (which relates to the tax exemption for the use of bond proceeds):
[N]o portion of the proceeds of such issue is to be used to provide (including the provision of land for) any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
This statute remains the same as when it was passed in 1986. Accordingly, it has not been updated to address potential developments regarding cannabusinesses. As a consequence, investments in cannabusinesses in opportunity zones may qualify for the tax incentives offered by I.R.C. § 1400Z even where other “sin businesses” may not.
Even though a plain reading of I.R.C. § 1400Z dictates that cannabusinesses are not disqualified, the potential impact of I.R.C. § 280E on cannabusinesses may be of some concern. Section 280E provides:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business…consists of trafficking controlled substances…which is prohibited by federal law or the law of any State in which such trade or business is conducted.
While this section may apply to the operation of cannabusinesses, it should not negate the tax incentives offered to investors in that business for a few reasons. Section 1400Z-2 does not relate to any deduction or credit – it is a gain exclusion or deferral mechanism. The opportunity zone incentives also do not depend upon whether there was “any amount paid or incurred…in carrying on any trade or business.” Furthermore, there is no express language in I.R.C. § 1400Z-2 that denies its benefits to investments in cannabusinesses.
The opportunity zone provisions of the Tax Cuts and Jobs Act provide a mechanism for tax-advantaged investments, including those in cannabusinesses. Given recent statutory changes (e.g., introduction of deduction for qualified business income deduction) and interpretations of I.R.C. § 280E, owners of cannabusinesses should consult a tax advisor to ensure that they are effectively minimizing their federal and state income tax liabilities. Rosenberg Martin Greenberg is experienced in all aspects of federal and state tax laws, including developments germane to the legalization of marijuana in Maryland. For a free consultation, please contact Brandon N. Mourges at firstname.lastname@example.org or 410.951.1149.