For years, cannabis executives have built their financial strategies around a single hope: that Section 280E would vanish with federal reform. But hope has quietly drained billions from balance sheets. Every year, operators “wait it out”; they forfeit the one thing they can’t afford to lose, cash flow.
It’s an understandable reflex. No one likes paying taxes they shouldn’t owe, and 280E has always felt temporary. But the reality is clear: Washington doesn’t move on cannabis at the pace business requires. Operators who treat legislative change as a business plan are gambling with time, liquidity, and their company’s future.
The Cost of Waiting
Under 280E, cannabis companies can’t deduct ordinary and necessary business expenses, resulting in effective tax rates that often exceed 70%. That burden has crushed margins and stalled reinvestment. The irony is that while leaders lobby for relief, the IRS already provides a legal framework that can make 280E’s impact completely irrelevant: the Employee Stock Ownership Plan (ESOP).
An ESOP, when structured properly, allows companies that are 100% employee-owned to operate entirely income-tax-free at both the federal and state levels. In cannabis, where every after-tax dollar counts, that can double available cash flow.
ESOPs work by selling ownership of the company to a trust that holds shares on behalf of employees. The founder receives liquidity, the company gains a massive tax advantage, and employees become genuine stakeholders in its success.
An ESOP allows a company to keep more of what it earns. Instead of sending large sums to the IRS, those funds stay in the business where they can support growth and stability.
Proof in Practice: Theory Wellness
When Theory Wellness became the first cannabis company in the U.S. to sell to its employees via an ESOP, it didn’t just make history. It proved what was possible. By transitioning to employee ownership, Theory Wellness created a structure that aligned purpose with profitability. The company retained its culture, rewarded long-time staff, and unlocked a permanent tax exemption that removed the vice-grip 280E had on the company’s finances.
That move wasn’t theoretical; it was financial engineering in action. In many industries, companies that share ownership with their teams tend to keep employees longer and run more efficiently. When people have a real stake in the outcome, they’re more invested in helping the business grow.
Cannabis remains capital-starved. Banks are hesitant, and equity investors often require terms that founders don’t want. An ESOP is a sale to an employee trust at fair market value. It delivers liquidity now, potential deferral of capital gains for the seller, and powerful company-level tax benefits, zero federal and state income tax when 100% ESOP-owned, so cash flow rises. Founders can stay to manage the business post-sale and, if structured correctly, receive warrants that allow a future buyback at today’s low equity value. 280E becomes irrelevant, the board still governs, and the company stays independent of outside buyers.
Additionally, ESOPs are fully compliant with current IRS regulations. This is the farthest thing from a loophole or gray area. It’s an established structure used for decades in mainstream industries. Brands like Publix, King Arthur Baking, and Clif Bar have thrived under employee ownership. Cannabis companies can do the same, yet few know it’s possible.
A Shift in Mindset: From Operator to Financial Engineer
The next phase of cannabis leadership requires a shift in perspective. Founders and executive teams can no longer afford to think only like operators; they must think like engineers of capital. Waiting for Congress to fix 280E is not a strategy. It’s an expensive form of denial.
When structured with discipline, an ESOP allows leaders to:
Eliminate income tax entirely for employee-owned entities. Reinvest tax savings directly into expansion and talent retention. Secure liquidity for founders while maintaining operational control. Build lasting employee loyalty through true ownership.The Call to Action
As 2026 approaches, the winners in cannabis won’t be those who waited for policy change. They’ll be the ones who engineered their own relief. They’ll be the CEOs who saw 280E for what it was, a constraint that forced financial creativity and turned it into a competitive advantage.
For decades, ESOPs have helped companies outside cannabis grow faster, last longer, and outperform peers. Now, they’re poised to do the same here. The model is legal, repeatable, and transformative. The only question is whether leaders will seize the opportunity or keep waiting for a political rescue that may never come.
The future of cannabis finance belongs to the builders, not the bystanders. In this industry, time is the one asset that’s still taxable.
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© Cannabis Industry Journal
