The federal government hasn’t formally sorted out whether Opportunity Zone funding can be used for recreational or medical marijuana purposes.
That has left the legal community to date trying to determine how precisely the new federal tax incentive program can be deployed now that both recreational and medical marijuana are legal in Michigan.
Generally speaking, legal experts agree that Opportunity Zone funding cannot directly fund a marijuana operation because cannabis is still an illegal Schedule I narcotic under the Controlled Substances Act at the federal level but could, on the other hand, provide equity to a real estate project that ultimately leases space to one or more businesses involved in the state’s fledgling recreational pot industry.
„From a real estate perspective, I think we are fine where we are at,” said Joseph Kopietz, member of the Real Estate Group for Detroit-based law firm Clark Hill PLC. „But in order for me to ever comfortably advise anybody to even consider investing in an operating business that’s engaged in marijuana activities, it needs some guidance out of Treasury.”
An email was sent to the U.S. Department of Treasury seeking comment.
„If enough people start asking this question, if it starts appearing more publicly, then maybe they’ll say they have to nip it in the bud,” said Saulius Mikalonis, senior attorney in the Bloomfield Hills office of Plunkett Cooney PC, where he heads up the law firm’s Environment, Energy and Resources Law and Cannabis Law industry groups.
Michigan voters in 2018 legalized recreational marijuana use and possession, a decade after they legalized marijuana use for medical purposes.
Opportunity Zones were created under the federal tax reform legislation passed by Congress in 2017 to allow capital gains to be diverted into so-called Opportunity Funds, which are allowed to invest in low-income census tracts — known as Opportunity Zones — that have been strangled of investment in recent years and decades. The funds can invest in things like real estate and businesses. Yet Bloomberg Tax reported in May that Treasury Secretary Steven Mnuchin „advised against” using Opportunity Zone equity „to fund a marijuana business, even those that are legal at the state level.” His comments came in front of a Senate panel.
While that doesn’t have the full force of law, said Scott Kocienski, an attorney in the Bloomfield Hills office of Detroit-based Dykema Gossett PLLC, it does complicate the equation.
„It gives you pause because the opportunity for audit is more likely,” he said. „Not only could that potentially impact whether you have a true Qualified Opportunity Zone fund, but you’re bringing into play your actual operating business and bringing greater scrutiny to that operation and the potential tax ramifications for that.”
Under law, Opportunity Zone funding isn’t allowed to finance so-called „sin businesses,” which include things like massage parlors, golf courses, liquor stores, racetracks, etc. However, cannabis operations are not specifically identified in the federal tax code as such.
„Illegal nuclear dumps aren’t on there, maybe we could do that, too,” Mikalonis joked.
James Combs, a partner and leader of Detroit-based Honigman LLP’s Tax Practice Group, said the Internal Revenue Service „has not really provided a whole lot of guidance on cannabis businesses or related activities.”
He also said multiple scenarios could further complicate the matter, including whether the medical and/or recreational marijuana businesses also are involved in hemp, which became legal under federal law last year. Hemp and cannabis are effectively the same plant and really only differ in tetrahydrocannabinol, better known as THC, content, with cannabis having more than 0.3 percent and hemp having less.
Opportunity Zones aren’t the only foggy tax issue regarding marijuana.
A provision of the tax code known as 280E prohibits business tax credits and deductions for businesses involved in controlled substances like marijuana, even if they are legal at the state level where the business is conducted. Alpenglow Botanicals LLC, a Breckenridge, Colo.-based medical marijuana firm, tried to claim a variety of deductions, ultimately suing the IRS after its owners' tax bills increased by more than $50,000, but the federal government argued that the business couldn’t claim the deductions. The U.S. Supreme Court this summer declined to hear the case.
In November, in a 56-44 vote, Michigan voters approved letting people 21 and up buy, possess and use marijuana and marijuana-infused edibles. In addition, they can grow up to 12 plants for personal use, Crain’s reported at the time. Sales are likely to begin next year. It also imposes a 10-ounce limit for marijuana kept at households with a 2.5-ounce personal possession limit. More than 2.5 ounces kept at households are required to be secured in locked containers.
Municipalities can opt out of allowing marijuana-related businesses to operate in their community and businesses retain the right to maintain a drug-free workplace, where employees are subject to termination for use even as it’s legal.