Internal Revenue Code 280E is the bane of a cannabis business’s existence. 280E is a federal tax code that prevents cannabis-touching businesses from deducting standard business expenses, such as salaries, rent, marketing, and even legal expenses, leaving them with massive tax burdens. That means cannabis businesses pay taxes on their gross income, not their actual profits. As a result, their effective tax rate can reach a staggering 60–65 percent.
But did you know that the U.S. government has created a way to make 280E irrelevant for cannabis companies?
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Enter Employee Stock Ownership Plans (ESOPs). ESOPs are one of the most overlooked financial tools in business, but especially in cannabis. The federal government actively incentivizes ESOPs as a wealth-building and tax-reduction strategy—even major corporations like the grocery food chain Publix have taken advantage of the tax benefits of becoming an ESOP. Yet, few cannabis operators realize they can use them to legally sidestep the impact of 280E.
But what most cannabis operators don’t realize is that there’s a little-known way to make 280E irrelevant… Here’s how.
What is an ESOP?
An ESOP is just another way for a company to sell itself. You can sell to private equity. You can sell to a strategic buyer. Or—and this is the one most people overlook—you can sell to your employees.
Here’s why it works: In an ESOP, employees become the owners. Their success is directly tied to the company’s success. That alignment builds a culture of accountability. People step up. They care more. Because now they have a stake.
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Still, a lot of owners ask the same question: Why would I sell to my employees? Sure, they’ve been loyal. You trust them. You want them to do well. But how can an ESOP compete with private equity—especially when your employees don’t have the capital?
That’s where the government steps in. To encourage employee ownership, it offers a set of tax advantages so powerful that they can outcompete traditional exit strategies. Companies operating as 100 percent ESOP-owned S Corps pay zero federal and zero state income taxes. That means 280E is no longer relevant. The impact on cash flow is immediate and massive.
And that’s just the start. Sellers can defer capital gains taxes—sometimes permanently—while employees become deeply invested in the company’s success. That drives performance, boosts retention, and builds long-term enterprise value.
Selling to employees isn’t the soft option. It’s the smartest move a cannabis owner can make.
In a traditional company, if a coworker slacks off, it’s frustrating but doesn’t impact your paycheck. In an ESOP, poor performance literally takes money out of everyone’s pocket, so employees won’t tolerate it. This built-in accountability drives higher productivity. As their stock value grows, so does their commitment. It’s the same mindset as being self-employed: if you don’t perform, you don’t profit. ESOPs consistently boost productivity and strengthen companies.
Unlike a union, an ESOP gives employees real ownership—without having to put in their own money. When a cannabis company becomes employee-owned through an ESOP, it usually takes out a loan to buy out the owner, either through a bank loan or a seller’s note.
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Here’s the part most people miss: the company can take a large ESOP-related deduction based on that loan in the year the plan is set up. That’s a big deal. It means the government is helping fund the sale by reducing the tax hit.
(Yes, there are technical rules around how this works—it’s treated as a direct expense through COGS—but the impact is the same: the buyout becomes far more affordable.)
It’s one of the rare moments where everyone wins: the owner gets bought out, the employees get ownership, and the company gets a massive tax break.
The Government’s Hidden Incentives for ESOPs
In the 1970s, Congress recognized that capitalism works best when more people have a stake in it. To encourage business owners to sell (or partially sell) their companies to employees, they introduced financial incentives that made employee ownership more attractive and accessible.
Today, cannabis operators can use this little-known strategy to double their cash flow, create long-term stability, and turn employees into vested stakeholders—all while dramatically reducing their tax burden.
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Capital Gains Tax Deferral
When selling to private equity, owners must pay capital gains tax—typically around 30 percent, once federal and state taxes are combined. But when selling to employees through an ESOP, owners can defer those taxes. And if structured correctly, they can defer them indefinitely.
Example:
Let’s say an owner sells their cannabis company for $20 million. If they sell to private equity, they’ll owe roughly $6 million in capital gains tax—right off the top. But if they sell to an ESOP and use the right structure, they can defer that $6 million. In some cases, they may never have to pay it at all.
That’s not a loophole. It’s a government-backed incentive to keep businesses locally owned and broadly shared. And it can mean millions more in the seller’s pocket.
Tax-Free Status for the Company
When a company sells 100 percent of its shares to an ESOP, it stops paying federal and state income taxes—permanently. Imagine doubling cash flow overnight just by becoming employee-owned. That extra cash can be used to reinvest, pay down debt, or reward employees. It’s one of the most powerful advantages of the ESOP structure.
Government-Subsidized Financing
The government doesn’t just allow ESOPs—it helps fund them. By making the loan payments tax-deductible, the government effectively subsidizes the buyout, making it far more affordable.
Warrants for Owners
An ESOP is a win for employees and owners. Employees gain ownership, which drives retention and performance. Meanwhile, owners can receive warrants—giving them the option to buy back a portion of the company later. That means they can stay involved, continue to lead, and still share in the future upside.
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How ESOPs Help Cannabis Operators Beat 280E
If a company doesn’t pay taxes, then deductions don’t matter—and 280E becomes irrelevant. Take Native American tribes, for example. They don’t pay taxes and don’t need to worry about deductions, depreciation, or amortization. A 100 percent ESOP-owned S Corporation works the same way: no federal or state income taxes. So 280E no longer applies.
But this only works if the company is an S Corp and the ESOP owns 100 percent of it.
If the company is a C Corp, even if the ESOP owns 100 percent, it still pays full corporate tax at the entity level. There’s no tax pass-through. The ESOP might be tax-exempt, but the company isn’t.
If the company is an S Corp and the ESOP owns only 75 percent, the remaining 25 percent owner still owes taxes on their share of the profits. That means the company has to distribute cash to cover their tax bill—and because S Corp distributions must be proportional, the ESOP also receives cash it doesn’t need. This dilutes the ESOP’s advantage and creates inefficiencies.
Bottom line: To eliminate 280E and unlock full tax benefits, the company must be structured as an S Corp and 100 percent owned by the ESOP. That’s what makes the model work—and that’s exactly how we do it.
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What if 280E Goes Away?
In the world of 280E, the impact of an ESOP is even greater because cannabis companies face effective tax rates of 60–65 percent. If 280E is repealed through rescheduling, that rate would drop to 40–45 percent.
For example, with $10 million in net income (EBITDA):
- Under 280E, taxes would be $6–6.5 million.
- After 280E is repealed, taxes drop to $4–4.5 million.While an ESOP under 280E provides massive tax savings, even in a post-280E world, it still offers significant benefits.
If 280E goes away, companies wouldn’t need to sell 100 percent to an ESOP to maximize benefits; they could sell 30–40 percent and still unlock advantages. This flexibility opens up more strategic opportunities for structuring ESOPs in the cannabis industry. Think about it this way, 280E didn’t impact Publix before they sold to an ESOP, but they still chose to do it because of the additional tax advantages.
*This article was submitted by a guest contributor. The author is solely responsible for the content.