Taxes when selling a cannabis business: 280E and beyond

How is the sale of a cannabis business taxed?

Like any other business sale, with cannabis-specific complications around it. There is no special federal tax on selling a licensed cannabis company. You compute gain as the amount you receive minus your adjusted basis in what you sold. The character of that gain, capital or ordinary, depends on what was sold and how the deal is structured.

Piece of the price	Typical federal treatment for an individual or pass-through owner
Goodwill, licence-related intangibles, going-concern value held over a year	Long-term capital gain: 0%, 15%, or 20%
Equipment, up to prior depreciation	Ordinary income (depreciation recapture)
Buildings, to the extent of prior straight-line depreciation	Up to 25% (unrecaptured section 1250 gain)
Inventory	Ordinary income
Non-compete payment	Ordinary income
Consulting or transition pay	Ordinary income, plus employment or self-employment tax
Interest on a seller note	Ordinary income
High earners	A further 3.8% net investment income tax may apply above $200,000 single or $250,000 joint modified AGI, depending on your role in the business

The 0%, 15%, and 20% brackets shown on the IRS page are for tax year 2025, when the 20% rate began above $533,400 for single filers and $600,050 for joint filers. State income tax is on top.

Where does 280E come into a sale?

Section 280E denies deductions and credits to a business trafficking in Schedule I or II controlled substances. It does not reach basis, so it does not directly inflate the gain on your sale. It matters in four other ways.

1. Your final operating year. Until the closing date you are still an operator. Adult-use income is still taxed on gross profit with no deduction for rent, payroll outside cost of goods, or marketing. Deal costs paid by the operating company may be disallowed too; ask your CPA which entity should bear them.
2. Back taxes. Years of 280E bills have left many operators with unpaid balances, payment plans, or uncertain positions. These surface in diligence and become liens, escrows, or price cuts. See tax liabilities and holdbacks in a sale and selling with tax delinquency.
3. The buyer’s price. Buyers pay for after-tax cash flow. An adult-use buyer also gets little benefit from a stepped-up basis in goodwill, because amortisation is a deduction that 280E disallows. That weakens the usual buyer argument for an asset deal and gives you room to negotiate. The valuation effect is in how 280E affects valuation.
4. Medical vs adult-use. The 28 April 2026 order moved marijuana subject to a state medical licence to Schedule III. Treasury and the IRS said on 23 April 2026 that coming guidance will treat the change as applying from the full taxable year that includes the order’s effective date, and will address apportioning expenses for businesses with both activities. As of September 2026 that guidance had not been published. Adult-use activity stays under 280E. The background is in 280E explained for buyers and sellers and the Congressional Research Service’s legal overview of 280E.

Asset sale vs entity sale: the tax difference

In an asset sale, each asset is sold separately for tax purposes, so part of your gain is ordinary. In a sale of membership interests or stock, most of the gain is capital, although partnership rules can still treat the share of gain tied to inventory and recapture as ordinary.

Your entity type matters most:

• LLC taxed as a partnership, or S corporation. One level of tax either way. The difference between structures is mainly character: how much is ordinary.
• C corporation. An asset sale is taxed at 21% inside the corporation, and again when the proceeds are distributed to you. Many cannabis operators chose C corporation status to contain 280E exposure at the entity level. If that is you, a stock sale is usually far better, and you should know that before you sign a letter of intent that says “asset purchase.”

State cannabis rules may force the structure regardless of tax. The legal comparison is in asset sale vs membership-interest sale.

Illustrative example: C corporation

Illustrative only, federal tax only, basis assumed to be zero.

	Asset sale	Stock sale
Price	$3,000,000	$3,000,000
Corporate tax at 21%	$630,000	$0
Distributed to shareholder	$2,370,000	n/a
Shareholder tax at 23.8%	$564,060	$714,000
Net to seller	$1,805,940	$2,286,000

The gap is about $480,000 on the same price. A buyer who insists on assets should expect to pay for it.

Purchase-price allocation

In an asset sale, the price is divided among seven asset classes under section 1060, and both sides report it on Form 8594. You want more in goodwill; the buyer may want more in equipment and inventory. Agree the allocation in the purchase agreement, not afterwards. Details are in purchase-price allocation in cannabis deals.

Seller notes, earn-outs, and stock

Most cannabis deals are not all cash, and each form of payment is taxed differently.

• Seller note. The installment method generally lets you recognise gain as principal is received. But IRS Publication 537 says depreciation recapture must be reported “in the year of sale” whether or not you were paid, and inventory does not qualify. A low down payment can leave you with a tax bill larger than your cash. See seller financing in cannabis deals.
• Earn-out. Usually taxed as received under contingent-payment installment rules, with part treated as interest.
• Buyer stock. Property other than money is generally treated as payment in the year received, so locked-up shares can be taxed before you can sell them. See selling for MSO stock.
• Real estate sold alongside. Taxed on its own terms, and a like-kind exchange may be available for the property but not for the business. See selling a cannabis business with real estate.

State and local tax

State income tax on the gain ranges from none to more than 10%, depending on the state. Separate from income tax, many states will not approve or will delay a transfer until sales, excise, and cannabis taxes are current, and some impose successor liability on the buyer, which is why buyers insist on clearance certificates. A number of states have decoupled from 280E for state income tax, which affects your final-year state return but not the federal one; see state 280E decoupling.

A pre-sale tax checklist

1. Confirm your entity’s tax classification and model asset and entity structures side by side.
2. Reconcile every federal and state tax account and get transcripts. Know your balances before a buyer does.
3. If you hold both medical and adult-use licences, separate the books now so a buyer can see the medical earnings that are outside 280E.
4. Rebuild your basis records: capital contributions, equipment cost, accumulated depreciation.
5. Estimate tax on the likely deal mix and set a minimum cash-at-close figure that covers it.
6. Ask your CPA about timing: a closing in January instead of December moves the tax due date by a year.
7. Start early. Most useful planning has to be in place well before a letter of intent.

For the tax on the gain shown alongside fees, holdbacks and payoffs, see what a seller actually nets: worked examples.

Broader planning, including timing and estate issues, is in cannabis exit planning. This page is educational and is not tax advice; a CPA with cannabis clients should run your numbers.