The CARES Act, an acronym for the Coronavirus Aid, Relief, and Economic Security Act, implemented the Paycheck Protection Program (PPP). But is there an alternative that applies to the cannabis industry?
The Small Business Administration (SBA) funded and administered the PPP. This was meant to offer potentially forgivable loans to businesses impacted by the COVID-19 pandemic. It was created to cover payroll and other costs associated with operations.
Unfortunately, cannabis companies have not been given the same opportunity to obtain PPP loans. Since cannabis cultivation and sales are still illegal federally, these operations cannot get PPP loans. Furthermore, the SBA published a Policy Notice in April of 2018 to outline how prohibition impacts direct and indirect cannabis businesses, thereby banning them from obtaining SBA loans.
In this article, we discuss an effective alternative to the PPP loan for cannabis.
Interested in getting relief during the COVID-19 pandemic for your cannabis business? Contact us today to learn more about what we can do for your operation!
Beware of PPP Loans for Cannabis
PPP loans first became available in early 2020. They were extended by the American Rescue Act and have quickly become one of the most commonly discussed provisions for businesses across the country’s COVID-19 relief packages.
These loans are forgivable for some small businesses and enable them to continue paying employees without issue. However, even though many cannabusinesses would qualify for these loans, plant-touching cannabis businesses should avoid PPP loans. While some might encourage these operations to apply, the federal government’s classification of cannabis is problematic for this type of loan.
Since the SBA has its own application process, we need to look at that to determine whether or not cannabis applicants can successfully get a PPP loan. During the application, the SBA requires affirmation that they are not violating federal law under penalty of perjury. Due to the state-legal cannabis businesses’ unavoidable violation of federal law, it’s impossible to truthfully affirm that the operation does not violate federal law.
Cannabis businesses have always had trouble interacting with the government, so it should come as no surprise that applying for relief funds can be challenging. However, the Employee Retention Credit and State Small Business Credit Initiative allow struggling cannabusinesses to receive assistance from government agencies.
The ERC: An Alternative to the PPP for Cannabis
The Employee Retention Credit (ERC) is a provision of the CARES Act. Though the ERC has not been given the same attention as PPP because companies cannot get both the ERC and PPP funds simultaneously, it’s still an option. Many businesses could not qualify for the PPP or obtained PPP funds and had to return them to the government not long after.
Now, the ERC offers a fully refundable payroll tax credit that employers can use. However, it doesn’t come without the following limitations:
- Half (50%) of qualified wages and health plan expenses had to have been paid to the company’s employees in a calendar quarter.
- This credit only applies to qualified expenses paid between March 12, 2020, and January 1, 2021.
- The highest amount of qualified wages that can be taken into account for the ERC with respect to each employee for all calendar quarters throughout 2020 is $10,000. The maximum credit for an eligible employer for qualified wages paid to each employee $5,000 (half of $10,000).
For your business to qualify for the ERC, it must experience some suspended operations due to the restrictions the government has imposed or a significant decline in gross receipts. Thus should be either a partial or complete suspension of operations.
A decline in gross receipts can be considered “significant” if the employer’s gross receipts for a given quarter at some point in 2020 drop below 50% of their gross receipts for the same calendar quarter in 2019.
Companies qualifying for the ERC need to determine how many average monthly full-time employees (FTEs) worked for them in 2019. If your company employed beyond 100 average monthly FTEs, it’s only allowed to claim the credit on wages and health plan expenses paid for your employees that weren’t working over the course of the eligible months. However, if your company had 100 or fewer employees, then you’re allowed to claim the credit for all employees, regardless of whether they were working or not.
To claim the ERC, you’ll do so on IRS form 941, “Employer’s Quarterly Payroll Tax Return.” If your company is eligible, you can reduce its federal employment tax deposits by the permissible ERC amount. However, if your ERC is in excess of the remaining federal employment tax deposits for that quarter, your company can file Form 7200 to claim an advance refund.
IRC Sec. 280E: Does this affect cannabis business eligibility for the ERC?
Yes and no.
At this point, IRC Sec. 280 does not allow federal tax deductions and credits from gross income if the taxpayer engages in business relating to the manufacturing, distribution, or sale of controlled substances classified as either Schedule I or Schedule II drugs. This is the result of the 1970 Controlled Substances Act.
Since cannabis is still classified as a Schedule I drug, the sales activity is viewed as trafficking under federal law. With this in mind, IRC Sec. 280E keeps cannabis businesses from benefiting from typical business deductions.
However, equally important to note is that IRC Sec. 280E is an income tax provision of the Internal Revenue Code. The ERC operates as a payroll tax credit. Furthermore, the CARES Act does not explicitly exclude cannabis businesses from claiming the ERC.
While ERC eligibility is questionable and the IRS has not offered guidance just yet, there’s a chance that cannabis businesses that meet all eligibility requirements of the ERC could be eligible.
More About The ERC
At Northstar, we’re helping cannabis businesses save on payroll taxes with the COVID-19 ERC. If your company has been adversely impacted by the pandemic, we’re ready to help you at no upfront cost. Simply put, we only get paid if you do! This includes 3-year FREE ERC audit support!
Here’s a quick summary of the ERC and how it offers relief to cannabis businesses:
ERC Eligibility Explained
Through the COVID-19 Employee Retention Credit, cannabis businesses can get a payroll tax credit to help ease the adverse impact of the coronavirus. The ERC is an option for employers, as well as tax-exempt and some government organizations, as long as they satisfy ANY of the following conditions:
- Operations were either fully or partially suspended as a result of the orders from an appropriate governmental authority.
- Its gross receipts for a minimum of one calendar quarter were less than 50% in 2020 or less than 20% in 2021 of the gross receipts they had in 2019.
- The company qualifies as a recovery start-up business.
ERC Opportunity Explained
The ERC offers up to $33,000 per employee. This is meant to offset employers’ 6.2% FICA liability from March 12, 2020, through June 20, 2021, as well as 1.45% Medical Tax from July 1, 2021, through December 31, 2021. Any remaining credit gets refunded.
Your ERC is calculated quarterly as long as your business satisfies quarterly eligibility requirements. You could also capture retroactively if you didn’t capture in prior periods, as well.
With subsequent ERC changes, the availability expands, and the benefits increase in the 2020 and 2021 tax years.
ERC Process Summarized
To get started, we’ll need to determine if you’re an eligible employer for the ERC for any quarter. This will involve applying each test separately.
We’ll check your company’s employment level in 2019, as well. This will determine your ERC-eligible wages.
From there, we compute your ERC-qualified wages. This involves excluding wages used for PPP forgiveness and other tax credits.
Once we have this information on hand, we can calculate the ERC and work with your payroll provider to determine options to claim benefits. Then, we’ll complete an audit file to substantiate ERC.
Notable ERC Changes for Jan. 1, 2021, to June 30, 2021
The ERC for January 2021 to June 30, 2021, experienced the following changes:
- The ERC rate per employee increased by 20%, resulting in its expansion to 70% of qualified wages. In the past, this was 50%. Furthermore, the per-employee wage limit rose from $10,000 annually to $10,000 quarterly for 2021.
- Employers are now eligible based on their gross receipts of less than 80%. Previously, it was less than 50% compared to the same quarter in 2019. With this in mind, if your gross receipts drop by beyond 20% in 2021, your business is eligible for the payroll credit.
- Right after the calendar quarter, you can choose to use ERC immediately rather than Q1 and Q2 of 2021 compared to the same quarter in 2019 to determine your eligibility.
- For companies that didn’t exist in 2019, we’re now allowed to compare 2021 quarterly gross receipts to the same 2020 quarters to determine business eligibility for ERC.
- 2021 ERC credit is now accessible by public colleges, universities, organizations giving medical or hospital care, and some organizations that Congress has chartered.
- The definition of a large employer changes from more than 100 employees to beyond 500 employees in 2021. Thus, companies can use this broader definition of qualified wages if they are within this threshold. As a company, this allows employers to count wages paid to their active (working) employees and those who aren’t currently working.
- The Consolidated Appropriations Act (CAA) removed the limit on employees’ qualifying wages. Previously, the limit on qualified wages was the sum the employee would have been given during the 30 days prior to the qualifying period. Now, the ERC will allow companies to pay a bonus to their essential workers.
- If the company has less than 500 full-time equivalent employees, they can advance ERC payments during the quarter that the wages were paid to these employees. This also includes seasonal employers, employers who didn’t exist in 2019, and part-time employees.
Save on Payroll Taxes with the COVID-19 ERC
Ready to soar your business to new heights with tax incentives? Contact us today to partner with Northstar’s experienced tax professionals.