If Cannabis is Illegal Under Federal Law, How Is It Legal to Invest In a cannabis business in an opportunity zone and still get the federal tax benefits?
Investing in a cannabis business has a lot of risks. The biggest being that the federal government will enforce against you. Newly evolving businesses also have an inherent financial risk. These risks will not affect the tax benefits of an opportunity zone. You may be in jail, but you will get tax benefits.
The Opportunity Zone program is intended to stimulate positive growth within designated communities, as such there are restrictions on the types of investments in which an Opportunity Fund can invest. These investments are called “Qualified Opportunity Zone property,” which is defined as any one of the following: partnership interests in businesses that operate in a qualified Opportunity Zone; stock ownership in businesses that conduct most or all of their operations within a qualified Opportunity Zone; property such as real estate located within a qualified Opportunity Zone. So in essence, while cannabis may be illegal federally, you are purchasing stock/partnership in a business that operates in an OZ, that is legal. The IRS has yet to address this issue and it may provide on guidance as to what kind of business investment will be allowed, but as it stands now, you are permitted to invest.
There is no explicit prohibition against investing in cannabis under the OZ program. However, since cannabis is a Schedule I drug - a substance, or chemical are defined as drugs with no currently accepted medical use and a high potential for abuse - a cannabis business operating under an OZ fund would still be denied a federal tax deduction for anything except the cannabis costs. That taxable income will be taxed at the entity or fund investor level depending on the legal/ tax structure. If the cannabis business or OZ fund is sold after a 10-year hold then the post-investment appreciation in the cannabis business would side-step the federal (and possibility state) tax.
It necessarily needs to be legal in the local area of intended sale.
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