As a cannabis business, do you feel left out of the COVID-19 relief programs introduced in the past year and a half? Well, there may be hope for emergency relief through the Employee Retention Credit that emerged from the CARES Act.
The CARES Act passed in March 2020, and among business owners, the Paycheck Protection Program excited them most. PPP loans were forgivable loans offered by the U.S. Small Business Administration to incentivize businesses to keep their workforce employed throughout the pandemic. Through May 31, 2021, the SBA had approved more than 11 million PPP loans totaling nearly $800 billion thanks to multiple rounds of funding.
The SBA made it clear PPP funding was unavailable to cannabis business. Fortunately, the CARES Act also contained the Employee Retention Credit, a fully refundable payroll tax credit of up to $33,000 per employee on eligible wages paid between March 13, 2020 and December 31, 2021.
So, who is eligible for this credit?
Any business, including nonprofits, that experienced one of the following events:
– A full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel or group meetings because of COVID-19; or
– A significant decline in gross receipts, defined as 50% during any quarter in 2020 as compared to the same quarter in 2019, or a 20% decline in 2021 compared to the same quarter in 2019.
Many cannabis business owners are asking if IRC Section 280E will affect eligibility for the ERC. While 280E disallows businesses deductions and/or credits if they are in the trade or business of producing, manufacturing or selling Schedule I or II drugs under the 1970 Controlled Substance Act, it is an Internal Revenue Code section specific to income tax and does not apply to the payroll tax, which is in a separate IRC section. Since ERC is a payroll tax credit taken against an employer’s share of Social Security tax and is claimed on an employer’s Form 941 (payroll tax return), businesses in the cannabis industry may be eligible to claim the refund, assuming they meet the necessary ERC qualifications set forth by the IRS.
This credit has helped nearly all businesses. It may be even more helpful for businesses in the cannabis industry that were left out of other forms of COVID-19 relief.
Cannabis companies should act quickly. This may be the only instance a federal tax credit is available to marijuana-related businesses. And like many COVID-19 relief programs, the availability of funds may not last forever.
The IRS has not issued specific guidance stating a cannabis business would be denied the ERC; however, it should be mentioned there is always a level of uncertainty, especially when credit programs are in their early stages. Determining eligibility for a business and calculating the tax credit can be complex, so it’s highly recommended you reach out to a tax professional with experience in the cannabis industry and the ERC program before applying.
Jason A. Hoffman is a certified public accountant and a partner at Janover with more than nine years in the cannabis industry. He is the leader of the firm’s cannabis practice group and can be reached at firstname.lastname@example.org.
Ryan W. Glasco is a certified public accountant, a manager at Janover and a member of the firm’s cannabis practice group. He can be reached at email@example.com.