What cannabis operators with multiple entities need to watch before year end.
Most cannabis companies don’t run on a single entity. There’s usually a holding company at the top, a management company, maybe a separate real estate LLC, a payroll company, and the licensed entity itself. That setup makes sense. It can protect assets, keep the license clean, and help with your 280E planning. But here’s the thing. Every dollar that moves between those entities is a transaction. And the IRS can tax a lot of them, even when the money never leaves the family.
That catches people off guard. For the operator, it feels like moving cash from one pocket to another. To the tax code, you’re two separate taxpayers doing business with each other. Below are seven ways that plays out, and what to watch before you close the books.
The core issue: common ownership doesn’t make a transaction tax-free. To the IRS and to many states, related entities are separate taxpayers doing business with each other.
1. No consolidated return
Related companies only wipe out intercompany amounts when they file a consolidated return. Many cannabis structures either don’t qualify or choose not to. So that management fee one entity pays another? It’s income to the entity that receives it. Same with rent, royalties, interest, and intercompany sales. The payer might deduct it. The recipient still reports it. Nothing nets to zero on its own without a consolidated tax return.
2. Below-market pricing
Say your cultivation entity sells product to your retail entity for less than market rate. Feels efficient. But charging a related company below market opens the door for the IRS to assess income based on what an arm’s length deal would have brought. In plain terms, they can tax you on money you never charged. Related-party pricing needs to look like a deal between strangers.
3. Constructive dividends
When value moves between related parties without fair payment, the IRS can call it a constructive dividend. A below-market loan or a bargain sale can trigger it. And the result stings. The owner picks up taxable income, and the entity that gave up the value gets no deduction. You pay on one end and save nothing on the other.
4. Deferred gains and imputed interest
Two traps live here. First, a deferred gain on an intercompany sale comes back into income once the asset leaves the group. Second, a below-market loan between your entities creates imputed interest. The lender has to report interest income it never collected. The loan felt like a favor. The tax is real.
5. Gross receipts states
Some states tax revenue instead of profit. Ohio’s Commercial Activity Tax and Washington’s B&O tax both work this way. So an intercompany sale that washes out on your federal return can still create taxable revenue at the state level. Ohio’s CAT now applies above $6 million in gross receipts, so higher-volume operators especially need to run the math. What nets to zero federally does not always net to zero for your state.
6. Sales tax on leases
When one of your entities leases or subleases real estate or equipment to another, that rental income can be subject to sales tax. A lot of operators assume common ownership makes the lease exempt. It doesn’t. In many states the lease is a taxable transaction, even between companies you own top to bottom.
7. Forgiven payables
Say one entity carries a loan from another, and you write it off to tidy up the books. Feels like housekeeping. But when a related entity forgives a debt, the borrower usually recognizes a taxable gain from cancellation of debt. Clearing the balance can create phantom income out of thin air.
Structure it with intent
So what’s the real takeaway here? Intercompany activity isn’t the enemy. Done right, it keeps your structure clean and your 280E position strong. Done carelessly, it hands the IRS and your state extra income to tax, sometimes on money that never changed hands.
The fix is boring, and it works. Charge market rates. Paper your loans with real terms and real interest. Track every intercompany transaction like it’s a deal with an outside company, because for tax purposes, it is. Then review the whole picture before year end, while you can still fix what needs fixing. And most importantly, make sure your financial accountants and tax accountants speak to each other during the year, not just at tax prep time.
Intercompany transactions can be efficient and clean when you structure them with intent. They get expensive fast when you don’t. The cannabis experts at High Rock Accounting ensure both the financial accounting and tax accounting matters get analyzed completely before providing advice. Reach out today to get an analysis of your hidden intercompany traps.
Melissa Diaz, CPA
Melissa Diaz is a partner at High Rock Accounting, where she leads outsourced accounting and fractional CFO services for cannabis operators. High Rock helps cannabis companies keep clean books, stay compliant, and structure their entities with intent.
Talk to us about your structure: www.highrock.co/contact
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