By: Matthew Schiller, Esq. and Nick Richards, Esq.
“Details create the big picture.” –Sanford I. Weill
“You don’t pay taxes—they take taxes.” –Chris Rock
Given the state of the cannabis industry in mid- 2025— rescheduling on indefinite hold, companies changing hands, restructuring, failing, and in many cases, suffering several consecutive years of losses—it is more important than ever to conduct due diligence regarding a prospective (or sudden) acquisition’s “big tax picture.” To do this, and to ensure that your tax is paid and not taken, you must explore the hidden details of the various tax issues that arise with cannabis entities.
Federal
Federal payroll taxes (Forms 941 and 940) consist of the income, Social Security, Medicare, and unemployment taxes that employers must withhold from their employees’ pay, along with the employer share of those taxes.
The Trust Fund Recovery Penalty (TFRP) is the portion of the business payroll tax that can become the personal liability of owners, officers and/or others responsible for failing to pay the tax. When you acquire a company, ensure that you are remaining compliant with payroll tax liabilities to avoid personal tax assessments moving forward. If the Internal Revenue Service (IRS) is attempting to assess this penalty against you, or even if it has already been assessed, we can work with the Independent Office of Appeals to exonerate you, if you were not willful or responsible.
Federal corporate income tax is reported on Form 1120. Ensure compliance with any past due 1120 returns or assessments, and ongoing estimated tax requirements for the current year. If you are still operating at a loss, there should be no estimated payment due, but the IRS may not immediately agree. Recently, many cannabis companies have filed amended returns (Form 1120-X), taking the position that IRC Section 280E does not apply, and if the IRS has not yet processed your amended return, you should not resolve any pending Collection Due Process request until the return has been either accepted or denied. If your cannabis company has not filed amended income tax returns, then you might have an obligation to shareholders, or simply a fiscal obligation to the company, to consider and perhaps take a “no 280E” position on recent years’ tax returns. It is critical to be aware of the strongest current arguments that Section 280E does not apply to state-legal cannabis companies, given the rapid evolution of this issue, and a number of currently pending cases before the courts. It is also important to have a tax opinion letter from a qualified attorney, as well as a properly drafted Disclosure Statement (Form 8275), to protect yourself from IRS penalties.
State and Local
State income tax returns often have liabilities or undergo audits related to Section 280E. Companies filing amended federal returns typically also file state amendments. You should ensure that any past due income tax liabilities are in a formal Installment Agreement or otherwise protected from enforced collection. Remedies such as penalty abatement and Offers in Compromise (OIC) are typically available. Ensure that any filed tax liens are addressed, and be aware of available lien remedies such as a certificate of discharge, certificate of subordination, and lien withdrawal.
States, counties, and even cities collect cannabis excise tax, and some state and local authorities tend to aggressively audit cannabis companies. Ensure you understand any outstanding cannabis excise tax balances or pending audits for the company you are acquiring. States, counties and cities also collect sales and use tax, and payroll tax, and each tax might be handled by different departments within the state government. We can obtain Powers of Attorney to represent taxpayers before the taxing authority, conduct a thorough compliance check, and provide a holistic tax diagnosis. State and local sales tax, use tax, payroll tax, and (less commonly) cannabis excise tax are all considered “trust fund taxes,” so they carry personal responsibility to owners, officers, and/or responsible individuals. Ensure these trust fund taxes are paid first.
Conclusion
If you are looking to acquire, or have already acquired, a distressed cannabis company, a host of tax obligations may present a challenge to achieving profitability or flipping the assets. Understanding the different tax types and remedies available is crucial. Tax liens not properly addressed can follow the business assets to subsequent owners, and trust fund taxes can be assessed against responsible individuals, implicating your home equity, retirement accounts, and personal investments. An attorney who is an expert in cannabis taxation can help guide you through the maze and prioritize your tasks.
Should you be looking to acquire a cannabis company or company asset, the due diligence team at Greenspoon Marder is available to assist and provide guidance regarding the highly technical tax obligations that may make up the “big tax picture.” Please feel free to contact [email protected] or [email protected].
