While cannabis businesses have been disallowed from participating in most economic recovery packages resulting from COVID-19, companies in this industry may still be able to find relief through the Employee Retention Credit (ERC).
The Paycheck Protection Program (PPP) has been the most favorable among business owners. PPP loans were administered by the Small Business Administration, encouraging small businesses to keep their workers on payroll throughout the pandemic. However, the SBA made it clear that because of IRC Section 280E, Cannabis businesses did not qualify for a PPP loan.
IRC Section 280E denies cannabis businesses from deducting otherwise ordinary business expenses from gross income for income tax purposes. Even though recently, many states are passing and/or proposing legislation to legalize and/or decriminalize marijuana, the Federal government still considers marijuana an illegal substance, classified as a Schedule I drug under the Controlled Substances Act and therefore subject to IRS Section 280E.
However, there is the argument that IRS Section 280E is specific to income tax and does not apply to payroll tax. The ERC is not classified as an income tax credit but rather a payroll tax credit since it is issued as a refund on an employer’s Form 941. Since the credit is classified as a payroll tax credit, businesses that are in the cannabis industry and were otherwise ineligible of economic relief can claim the ERC refund if they meet all the qualifications. The ERC is a refundable credit that businesses can claim on qualified wages, including certain health costs that were paid to employees. Qualifications revolve around decreases in the percentage of gross receipts in calendar quarters compared to prior quarters, or businesses with forced closures or quarantines.
The IRS has not yet issued any specific guidance that a cannabis business would be denied the ERC. However, determining eligibility for the ERC and calculating the tax credit can be extremely complex. Our tax professionals have experience with the cannabis industry as well as the ERC program and are readily available to assist. Please contact our team of experienced accountants or reach us via our contact form.