Buying a Cannabis Operation May Mean Taking On Its Past

In cannabis transactions, the structure of the deal determines what carries over after closing. When a transaction is structured as a stock acquisition, the deal includes more than the operations you see day to day. Prior tax filings and the positions taken within them remain part of the picture after closing and become your responsibility. That can include how income and expenses were reported under Section 280E, which limits federal tax deductions for cannabis businesses, as well as other decisions reflected in earlier returns. Taking a closer look at those details early brings the structure of a deal and its implications into clearer view, especially when comparing stock and asset approaches and what each carries forward.

Understanding Tax Risks in a Cannabis Business Acquisition

Much of the diligence in a cannabis transaction comes down to how the business handled its tax reporting over time. Section 280E limits what can be deducted at the federal level, which has led many operators to take different approaches to allocating costs and reporting income. Those approaches are reflected in prior returns, and they become part of the review in any transaction.

When a buyer purchases the business entity itself, often structured as a stock acquisition, that history remains intact within what’s being acquired. That includes positions taken on deductions, how expenses were categorized, and how the business operated across multiple states. If those filings are later examined or audited by the IRS, the current owner is part of that process. Understanding how those decisions were made and how they align with current guidance helps clarify the level of exposure before terms are finalized.

Timing plays a role as well. Prior-year filings may still be open for review, depending on how they were reported. That can extend the relevance of past decisions into the period following a transaction, even as federal policy continues to evolve.

A detailed review of prior filings, supporting documentation, and the reasoning behind key decisions brings those factors into sharper focus. It also provides a more informed starting point for structuring the deal and evaluating next steps.

How Stock vs. Asset Purchases Affect Cannabis Acquisitions

Deal structure shapes how these considerations play out. In practice, this often comes down to how the purchase is set up—what is being acquired and what is left behind.

An asset purchase allows buyers to select specific parts of the business without acquiring the legal entity itself. From a tax perspective, this often provides a step-up in basis, meaning the buyer records those assets at their purchase price rather than their original cost. That updated value can then be depreciated or amortized over time, creating future tax deductions tied to the transaction. It also limits exposure to prior filings, since the entity and its reporting history remains with the seller.

In other cases, buyers move forward with the entity itself. This may align with licensing requirements or existing contracts, particularly in states where ownership changes are closely tied to regulatory approval. Those requirements vary, but they can influence how a deal is ultimately structured.

Sellers may also prefer a stock transaction to preserve eligibility for Qualified Small Business Stock (QSBS) treatment, which can offer favorable federal tax treatment on sale proceeds. When QSBS is in play, the potential impact on a seller’s after-tax outcome can be meaningful, often making structure a central point of negotiation as buyers weigh those benefits against the risks of acquiring the entity and its history.

Further Reading

For a deeper look at QSBS considerations:

• Stock Sale Essentials: Key Steps for Private Company Owners
• Qualified Small Business Stock Changes: Higher Caps, Shorter Holding

Once that structure is in place, it begins to shape how the deal is negotiated. Purchase price, indemnification provisions, and escrow arrangements are often used to allocate risk between buyer and seller. A buyer may accept a lower price in exchange for assuming certain exposures, while a seller may weigh those tradeoffs against the tax treatment of the transaction itself.

As diligence progresses, the focus often returns to tax. How prior returns were prepared, how positions were supported, and how consistently those approaches were applied tend to shape the discussion as details are reviewed. Bringing tax and legal advisors into the process early helps connect these elements. It allows for a more complete review of prior activity, a clearer understanding of structure, and a more informed approach to pricing and next steps as the transaction takes shape.

Putting This Into Practice: Cannabis Transaction Advisory

Cannabis transactions require a clear view of prior activity and current regulations, which continue to evolve across jurisdictions. AAFCPAs works with operators and investors to review prior tax filings, identify areas of potential exposure, and assess how those findings may influence deal structure and terms. Drawing on integrated experience across tax, accounting, and advisory, our team supports the evaluation of stock and asset transactions, collaborates with legal and financial advisors on purchase price allocation, and brings an informed perspective on state and local tax considerations alongside broader regulatory requirements. With experience advising cannabis businesses across the transaction lifecycle, we help you structure, negotiate, and move forward with greater clarity.

These insights were contributed by Joshua England, LLM, Esq., Partner & Tax Attorney and David McManus, CPA, CGMA, Tax Partner & National Cannabis Practice Leader.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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