Cannabis Businesses May Qualify for the Employee Retention Credit
Get up to $26,000 cash back per Employee!
Does Your Business Qualify for the ERC?
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, 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.
Cannabis businesses can qualify for the COVID-19 Employment Retention Credit, as it is classified as a payroll tax credit, and not an income tax credit. ERC is a refundable tax credit to businesses that retained employees during the pandemic who meet certain qualifications like forced closed closures, a decline in gross receipts from prior years, and other business interruptions such as full/partial suspension or supply chain issues. The credit is worth a maximum of $26,000 per w-2 employee, which can be extremely lucrative depending on the number of employees a business retained through 2021. The best part about the credit is it DOES NOT COUNT AS INCOME, meaning you do not pay any tax on funds received, which makes the ERC IRS Section 280E compliant! The IRS writes you a check or deposits funds straight into your bank account they have on file.
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 by completing the contact form below or calling 866-955-4502.