The cannabis industry rarely looks to the federal government for support. Yet the raft of fiscal relief addressing COVID-19 has caused some in the industry to wonder what options, if any, might be available for them.
Although cannabis companies are ineligible to participate in the Paycheck Protection Program (PPP) under the CARES Act, both the CARES Act and Families First Coronavirus Response Act include provisions that may be available to reduce employer payroll tax liability for cannabis companies through certain deferrals and credits. Absent further federal guidance to the contrary, these tax benefits should be available to cannabis businesses.
The Families First and CARES acts each provide credits that can reach $5,000-plus per employee. Both provide tax incentives for employers to aid them in maintaining sufficient cash-flow to endure the economic and public health impacts of COVID-19.
– Sections 7001 and 7003 of the Families First Act provide businesses with tax credits to cover certain costs of providing employees with expanded family and medical leave and required paid sick leave related to COVID-19 from April 1, 2020 through December 31, 2020.
– Section 2301 of the CARES Act encourages eligible employers to keep employees on their payroll despite experiencing economic hardship related to COVID-19.
“Eligible employers” include those (a) shuttered by government authorities for any period due to COVID-19; or (b) whose gross receipts in any quarter in 2020 are below 50% when compared to the gross receipts of the same quarter in 2019. Self-employed persons may only claim the credit with respect to wages they pay to their employees. Self-employed earnings are ineligible for the credit. Employers can only claim one of the two credits for any given wage payment. Nevertheless, if an employer pays both type of wages, it can combine the credits for maximal benefit to reduce its overall payroll tax liabilities.
Both tax credits are fully refundable under these acts, meaning if the amount of the credit is more than the applicable payroll taxes owed by the employer, the employer will get a refund when it files its quarterly payroll tax return. If the employer does not wish to wait, then in anticipation of receiving these credits, the employer may keep payroll tax withholdings that otherwise would need to be deposited with the IRS. If those withholdings are less than the amount of the expected future tax credits, the employer may request an advance of the difference between the credits and the retained withholdings from the IRS.
Credits Under Families First
The credit allows employers to use those expenses related to providing paid sick and expanded family and medical leave, including Medicare taxes and Qualified Health Plan expenses allocable to such wages, against the employer’s 6.2% portion of Social Security taxes. It is available to most employers with fewer than 500 employees that pay “qualified sick leave wages” and “qualified family leave wages,” to their employees.
For paid sick leave, the maximum credit allowed is $5,110 per employee for up to 10 days (80 hours). For paid family leave to care for someone with coronavirus, the maximum credit allowed is $2,000 per employee, for up to two weeks (80 hours). For paid family leave to care for children due to coronavirus-related school or daycare closures, the maximum credit allowed is $10,000 per employee, for up to 10 weeks.
Credits Under CARES Act
The “Employee Retention Credit” is a fully refundable tax credit equal to 50% of “qualified wages” (including allocable qualified health plan expenses) that eligible employers pay their employees. It is available to eligible employers’ businesses that fully or partially suspended operations due to COVID-19 or that experience a significant decline in gross receipts.
The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so the maximum credit for an eligible employer’s qualified wages paid to any employee is $5,000 for the entire year.
Risk/Benefit Considerations
Uncertainty remains as to the federal government’s position, but the CARES and Families First acts do not explicitly exclude cannabis companies from these tax perks. Moreover, though Section 280E of the Internal Revenue Code disallows cannabis companies from taking any federal credits or deduction, that section is in the income taxes section of the code and, thus, should not apply to the acts’ changes to employment payroll taxes.
Cannabis companies should conduct their own cost-benefit analysis, informed by how much they stand to gain and lose by taking the risk. Although the IRS has published guidance for the new employer tax credits under both the Families First and CARES acts, there is no mention of cannabis employers being excluded from this relief. As employers begin to implement these tax credits, it is foreseeable that the IRS will, at some point, provide guidance for cannabis companies, but the timing and content of that guidance is unknown.
Until then, employers in the cannabis industry may want to consider these tax benefits, but it is highly advisable to consult with a cannabis lawyer before taking action.
Jeffrey Hamilton and David Hofmayer are attorneys and Wendy Hernandez is a law clerk at Farella Braun + Martel, a San Francisco law firm representing the cannabis industry. A more detailed version of this article is available at www.MarijuanaVenture.com.