Tag Archives: captive insurance

The Post-280E Opportunity: Turning Cannabis Risk Into an Asset

By Patrick Johnston
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The April 2026 Department of Justice rescheduling order landed with the weight of a decade of advocacy behind it. For an industry that has watched every other legal sector deduct its rent, payroll, and marketing costs while cannabis operators paid taxes on money they never made, the optimism is more than justified. It is earned. The uncertainty, however, is just as real.

A Quick Reminder of Current Law

Section 280E of the Internal Revenue Code prohibits businesses trafficking in Schedule I or II controlled substances from deducting ordinary business expenses. Operators may deduct the cost of goods sold under §471 and nothing else. The result is effective federal tax rates of 60 to 80 percent, and in some cases well beyond, on businesses that are licensed, regulated, and paying state taxes like any other industry. Among the largest publicly traded multi-state operators, contested 280E tax liability now exceeds $1.7 billion collectively.

Why Rescheduling Moves the Needle

The statutory logic is clean. As cannabis tax attorneys have broadly noted, a completed Schedule III reclassification could eliminate 280E by its own terms, potentially improving operator profitability overnight, in some cases dramatically.

What the April Order Actually Does

Here is where the headline optimism requires a reality check. The April 23 order covers two categories: FDA-approved cannabis products and cannabis produced by operators holding a state-issued medical license. That is it (at least for now).

Important: The April 2026 order does not broadly reschedule cannabis. Adult-use recreational operators remain in Schedule I pending completion of a formal DEA rulemaking hearing scheduled for June 29–July 15, 2026. Even for qualifying medical operators, the IRS has issued no formal guidance and is actively litigating 280E challenges in Tax Court. A final, legally durable rule covering all operators awaits the hearing, a post-hearing final rule, a likely 90-day waiting period, and near-certain legal challenges from opponents.

 

What Rescheduling Doesn’t Fix

280E relief is not federal legalization. Banking access remains a legislative problem.  The SAFER Banking Act is still stalled. Interstate commerce restrictions stay in place. Securities law complications for publicly traded cannabis companies don’t evaporate with a scheduling change. And state/federal conflicts don’t resolve automatically under Schedule III. The infrastructure problems that have defined this industry’s capital markets for a decade largely remain intact, unfortunately.

The Angles Worth Watching

Three questions are already moving through the industry. Will 280E relief trigger a wave of M&A activity as operators flush with new after-tax capital become acquirers? Will multi-state operators restructure entities to maximize exposure to state medical programs and capture Phase 1 relief ahead of a final rule? And will expansion plans such as new markets, facilities, and verticals that were shelved under 280E’s punishing math come back to life?

The answers are coming, but so is the litigation.

What You Can Do Now

As of April 22, 2026, state-licensed medical cannabis businesses are no longer subject to Section 280E of the Internal Revenue Code. Because the order also encourages the Treasury Department to consider retroactive 280E tax relief for prior years, a window is now open for opportunities to amend returns and file protective claims. Businesses should evaluate immediately with legal and tax counsel rather than waiting for formal guidance. The window to apply through the DEA Diversion portal for expedited DEA registration review closes on June 26, 2026. While DEA registration may not be required to obtain tax relief, it could provide important operational advantages, including the ability to transport and transact medical cannabis between DEA-registered facilities across state lines and participate more directly in medical research activities.

The Bottom Line

For operators navigating this still-unsettled landscape, 280E relief could be transformative. What hasn’t changed is the underlying risk environment: product recall exposure, business interruption vulnerability, and the coverage gaps that commercial cannabis insurance routinely leaves unaddressed. Operators who have long lacked the capital to address that exposure structurally may find, for the first time, that they have it. A captive insurance company allows an operator to turn that capital into owned, purpose-built coverage, thereby converting risk from a cost center into a financial asset.

The 280E thaw is real. In consultation with trusted counsel, applicable operators should consider the registration deadline of June 26, 2026. Plan accordingly, but verify before you act.

Commercial Insurance Has Failed Cannabis. Here’s What’s Next

By Patrick Johnston
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In 2024, Colorado state officials announced a recall affecting 172 stores across the state. Batches of flower and pre-rolled joints from one grower exceeded mold and yeast limits. The losses were immense, including for companies that thought the money they were paying each year to insurance companies for premiums would provide, only to discover that coverage wasn’t there when it mattered most.

This is not an isolated story. Cannabis operators across the country pay high premiums for policies riddled with exclusions, resulting in enormous uninsured exposure to areas including product recall, regulatory action, business interruption, cyber liability, and directors and officers coverage. Section 280E makes every uninsured loss even more painful, with effective tax rates that can exceed 60 percent of gross income. The commercial insurance market has failed this industry structurally. Some operators are looking at captive insurance as a structural solution.

What Is a Captive Insurance Company?

A captive is a licensed insurance company that your business owns. Rather than paying premiums to a carrier that keeps the underwriting profit, the promise of a captive is that owners can accumulate reserves, keep the insurance company’s profit, and write policies covering risks that commercial markets refuse to underwrite. As such, it is worth looking at the pros and cons of forming a captive.

 

The Pros

Coverage for gaps no commercial carrier will fill. Control over your risk program, on your terms, based on your coverage and philosophy. Financial upside: underwriting profit stays in your business, not your carrier’s. Stability against volatile premium markets. Risk management discipline that improves your operations over time. And a powerful signal to investors and acquirers that your business is built with institutional-grade infrastructure, which is a meaningful advantage in capital raises and exit valuations.

 

The Cons                                                                                                                              Captives are not right for every operator. A single-parent captive typically requires $300,000 to $500,000 or more in annual premium spend (though this number may be much lower in the cannabis space). Group captives are accessible at much lower thresholds, sometimes $50,000 to $150,000. Upfront capitalization is required and varies by structure. This is a long-term strategy, not a quick fix, because benefits compound over years, not quarters. Ongoing regulatory compliance is real, though the right partner, such as 3F Captive Services, manages everything on behalf of clients.

 

Who Is a Good Candidate?

Multi-state operators with significant insurance spend. Businesses with stable, recurring cash flow. Operators frustrated by commercial coverage gaps, a pain known most acutely by those who have experienced an uninsured loss. Companies are thinking five to ten years ahead, including those positioning for a capital raise or exit.

 

Who Is Not Ready Yet?

Very early-stage operators with minimal insurance spend. Businesses with constrained liquidity. Companies with unresolved risk management or compliance problems. Operators looking for a quick tax benefit rather than a genuine insurance program. If this describes you today, the captive conversation is worth revisiting as your business matures.

 

Addressing the Common Objections

“It’s only for big companies.” Not anymore (group captives have significantly changed the economics of entry). “The IRS will come after me.” Properly structured captives are written into the tax code and have consistently withstood IRS scrutiny. “My broker handles this.” Most commercial brokers are not captive specialists (and often know nothing about captives), and their compensation model creates a structural disincentive to recommend one.

 

How the Process Works

Stage 1: An exploratory conversation. For example, 3F offers interested partners a no-fee assessment. Stage 2: A comprehensive feasibility study, including independent actuarial pricing of every policy, multi-year financial modeling, and full program design. Stage 3: Formation and licensing. Stage 4: Ongoing management, including actuarial reviews, regulatory filings, claims, and governance.

Before the next recall, claim, or regulatory action tests your coverage, it’s worth asking a simple question: Are you truly protected? A captive is not a fit for everyone, but for operators with the scale, discipline, and long-term mindset, it can turn risk into a strategic asset rather than an ongoing expense. The cost of doing nothing is often invisible, until it isn’t. The operators in Colorado learned that the hard way. The better path is to evaluate your structure now, while you still have the ability to choose it

Learn more at: 3F Captive Services — Cannabis Industry

Why Cannabis Businesses Are Turning to Captive Insurance for Better Coverage

By Patrick Johnston
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It starts with a routine test result. A mid-size cannabis brand discovers that a batch of infused edibles has failed a pesticide screening. Within 48 hours, the company issues a voluntary recall, pulls product from dozens of dispensary shelves, and begins fielding calls from anxious retail partners. The financial damage — replacement inventory, logistics, regulatory compliance, and reputational repair — runs well into six figures.

Then comes the second blow: the insurance claim. The carrier cites an exclusion. The payout falls far short of actual losses. Or worse, the policy is non-renewed because the company is now considered “high-risk.”

This scenario plays out more often than anyone in the industry wants to admit. And it exposes a structural problem unique to cannabis: the commercial insurance market is thin, expensive, and full of holes.

 

Why Commercial Insurance Keeps Failing Cannabis Operators

Because cannabis remains federally illegal, the pool of insurers willing to underwrite cannabis businesses is small. Limited competition drives premiums up and coverage terms down. Many policies carry broad exclusions for the risks most common in cannabis operations — product recalls, crop loss, regulatory actions, and inventory spoilage. Operators routinely overpay for insurance that underperforms, year after year, enriching carriers while getting little in return.

For an industry already navigating 280E tax treatment, banking restrictions, and price compression, this is a problem that compounds.

 

What Captive Insurance Is — and How It Changes the Equation

A captive insurance company is a licensed insurance entity that a business owns and controls, established specifically to insure its own risks. Instead of paying premiums to a third-party carrier and watching that money disappear, the business funds its own captive. Think of it as a managed self-insurance fund with a formal regulatory structure — similar in concept to how large employers manage their own healthcare funds. The key difference is that the money stays with you.

When a covered loss occurs, the claim is paid from the captive’s reserves — reserves that belong to the company. Premiums not consumed by claims accumulate over time. A well-run captive builds equity year over year, compounding returns on its reserves. The financial benefit grows more meaningful with time, discipline, and sound risk management.

For catastrophic losses — the kind that would overwhelm any captive’s reserves — a reinsurance layer provides a ceiling on exposure. Routine and moderate losses are absorbed by the captive; extraordinary tail risk is transferred to the reinsurance market.

 

How Operators Actually Enter the Structure

A captive is a fully licensed insurance company, typically domiciled in a captive-friendly jurisdiction. It must meet capitalization requirements, file annual reports, and operate under regulatory oversight like any other insurer.

For most cannabis operators, a cell captive is the practical entry point. Rather than forming a standalone company, the business occupies a segregated “cell” within an existing Protected Cell Company — a shared infrastructure with legally isolated balance sheets. For smaller operators who want the benefits without the full capital commitment, a group captive — where multiple companies pool their risks — can be a viable path in.

 

Is It Right for Your Operation?

Captives aren’t for every operator. They require upfront capitalization, ongoing management, and regulatory compliance. The economics favor companies with meaningful premium volume. For smaller operations, the overhead may initially outweigh the benefit.

But for cannabis operators spending significant dollars on commercial insurance year after year — and consistently underinsured when it matters — what has been an operating expense can become a managed asset.

 

A Fortune 500 Tool Going Mainstream in Cannabis

Large corporations have quietly and effectively used captive insurance for decades. What’s new is that cannabis companies — facing a uniquely challenging insurance environment — are discovering the same structure works for them.

If you’re paying significant annual premiums and not getting full value, it’s worth the conversation.

 

Learn more at: 3F Captive Services — Cannabis Industry