As we enter Q2 of 2025, the cannabis industry has become increasingly pessimistic about the elimination of Section 280E of the Internal Revenue Code, whether via rescheduling or otherwise. Rescheduling appears unlikely in the foreseeable future, and certain members of the Senate have filed a bill that would make 280E continue to apply even if rescheduling were to occur

Cannabis ESOPs (employee stock ownership plans) can provide a structure to avoid 280E, as well as federal and state income tax, entirely.

At its most simplistic level, an ESOP transaction allows the company’s owners to sell their stock to an ESOP trust (the “Trust”) and to defer capital gains taxation of the sale proceeds. The Trust then owns the stock with the company’s employees as beneficiaries of the Trust. The ESOP transaction is financed in multiple ways, including through the use of cash on hand, third-party debt, and providing promissory notes to the sellers. Significantly, the company’s tax savings can be used to pay down the transaction debt. Given the scarcity of debt financing or institutional capital available to the cannabis industry, the ability to finance the sale of the company with tax savings is an enormous benefit.

There are multiple advantages of an ESOP, including:

1. Eliminates not only 280E, but nearly all federal and state income taxes. The money saved can be used to fund the purchase price paid to the selling owners, as well as for R&D, expansion, payment of other long-term debt, and so on.
2. An important tool for cashing out long-term investors. With the lack of capital to fund the M&A markets for cannabis companies, in many circumstances an ESOP transaction is the only viable means to provide investors with an exit and a return on their capital.
3. ESOPs provide employees with a feeling of ownership in the company, which studies have shown increases employee retention and productivity.
4. The ESOP structure allows present management to continue directing and running the business while simultaneously providing an exit for other owners.
5. ESOPs enable cannabis company owners to sell their ownership with the capital gains taxes either eliminated or greatly deferred.
6. Selling shareholders can receive warrants in the restructured company, enabling participation in the company’s economic gains as a tax-exempt entity.

Cannabis ESOPs are perhaps the only option to circumvent Section 280E’s harsh impact, avoid most federal and state income taxes, and provide company owners with a tax-advantaged exit opportunity. The Blank Rome Cannabis team and ESOP team have closed hundreds of ESOP-related transactions, including ESOP transactions for cannabis companies, across the United States.