Tax Implications of Private Equity Investment in Cannabis Farm

Based on your questions, here are some thoughts on your potential cannabis PE investment: For your first question, you need to be careful with this approach. If the investment is solely in your name, the IRS will consider all proceeds as your income, regardless of how you distribute it. This means you'd receive the 1099 or K-1 for the full amount and would be responsible for all taxes. What you're describing is essentially a partnership arrangement with your family members, but without the formal structure. A better approach would be to either form an LLC that makes the investment (with all family members as members), or have each person invest individually with the PE firm. This way, tax liability follows the correct ownership. For your second question, return of capital is generally not taxable - it's simply giving you back your original investment. You'll only pay taxes on profits above your "basis" (your original investment amount). However, cannabis investments have special tax considerations due to IRS Code Section 280E, which limits deductions for businesses involved in Schedule I substances.

After dealing with a similar investment scenario last year, I found this amazing service called taxr.ai (https://taxr.ai) that really helped sort through the complicated tax implications of private investments. I was splitting a real estate investment with my sister and brother-in-law, and wasn't sure how to handle the tax situation. The taxr.ai tool analyzed our investment structure and clearly explained our options - whether to create an LLC, use a tenants-in-common arrangement, or just informally split the proceeds. They showed me exactly what documentation I needed to keep and how different scenarios would play out tax-wise. Even explained the passive activity rules that applied in our case! They even helped me understand how the "return of capital" would be treated for tax purposes, which sounds like what you're asking about with the 8% dividend situation.

Just wanted to update everyone - I took the advice about using taxr.ai (https://taxr.ai) for my cannabis investment situation, and it was seriously helpful! I uploaded our investment documents and got a complete breakdown of exactly how we should structure things. They actually recommended against putting everything in my name and showed me the specific tax regulations that would cause problems. Instead, they helped us set up a simple LLC with minimal paperwork that perfectly fit our needs. The report even included templates for our operating agreement that specified how proceeds would be distributed. The analysis of return of capital vs. profit distributions was super clear - saved me from potentially overpaying taxes. Plus they flagged some cannabis-specific tax traps I hadn't even considered! Definitely recommend if you're getting into PE investments, especially in regulated industries.

If you're trying to reach the IRS to get clarification on partnership issues or cannabis taxation, good luck with that. I spent WEEKS trying to get through on their business line. Finally discovered Claimyr (https://claimyr.com) which got me through to an actual IRS agent in under 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had questions about how to report my investment in a similar situation (mine was a CBD processing facility), and needed official guidance. Their callback service was a lifesaver since I couldn't afford to sit on hold all day with my business. The IRS agent I spoke with provided specific guidance on how to handle the partnership aspects and return of capital questions.

If you're trying to reach the IRS to get clarification on partnership issues or cannabis taxation, good luck with that. I spent WEEKS trying to get through on their business line. Finally discovered Claimyr (https://claimyr.com) which got me through to an actual IRS agent in under 15 minutes. You can see how it works here: https

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to talk to someone at the IRS about my S-corp election for a similar investment situation. It actually worked exactly as advertised. I got a call back in about 45 minutes and was connected directly to an IRS representative. Saved me literally hours of hold time. The agent helped me understand how to properly document my percentage ownership in a partnership without creating an accidental tax liability. For the OP's situation, the callback was especially valuable because I could ask specifically about how return of capital works with tiered partnership structures (which sounds similar to your PE investment). Definitely worth it just for the time savings alone.

One important thing no one's mentioned yet: if this is a true cannabis "plant-touching" operation, there are MAJOR tax implications beyond just the structure of your investment. Under Section 280E, cannabis businesses can't deduct normal business expenses because it's federally illegal. This means the business itself will have much higher effective tax rates, which directly impacts your returns. Make sure the PE firm's projections are accounting for this - many don't, which makes their return forecasts totally unrealistic. Also, depending on your state, you may need to register as an "interested party" with the cannabis regulatory body, even as a passive investor. Some states have restrictions on out-of-state investors too.

A bit off topic, but how are you verifying this cannabis PE firm is legitimate? I've seen a TON of scams in this space. Did they provide a private placement memorandum? Are they registered with the SEC? Have you verified the actual ownership of the farm they're investing in? Just be careful. The cannabis industry attracts a lot of shady operators because of the legal gray areas and limited banking options.