An Alternative to the PPP for the Cannabis Industry?
August 17, 2020
By Benjamin Aspir, CPA, MST
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Paycheck Protection Program (PPP). The PPP, funded and administered by the Small Business Administration (SBA), was intended to provide potentially forgivable loans to businesses affected by the COVID-19 pandemic in order to cover payroll and other costs. However, cannabis companies have been prohibited from obtaining PPP loans due to the illegality at the federal level of cannabis cultivation and sale. Additionally, the SBA published a Policy Notice in April of 2018 specifically prohibiting both direct and indirect cannabis businesses from obtaining SBA loans.
A lesser known provision of the CARES Act is the Employee Retention Credit (ERC). The ERC has been overshadowed by the PPP due to a prohibition on companies from obtaining both the ERC and PPP funds. However, many businesses either did not qualify for the PPP or received PPP funds but later returned them to the government.
The ERC is a fully refundable payroll tax credit for employers. The limitations are as follows:
- 50% of qualified wages and health plan expenses paid to their employees in a calendar quarter.
- The credit applies to qualified expense paid after March 12, 2020, and before January 1, 2021.
- The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters in 2020 is $10,000.
- The maximum credit for an eligible employer for qualified wages paid to any employee is $5,000 (50% of $10,000).
In order to qualify for the ERC, a company must experience either partially or fully suspended operations due to restrictions imposed by the government or a significant decline in gross receipts. A “significant decline” in gross receipts is if an employer’s gross receipts for a given quarter in 2020 are less than 50% of their gross receipts for the same calendar quarter in 2019.
A company that qualifies for the ERC must determine the number of average monthly full-time employees (FTEs) it had in 2019. If the company had more than 100 average monthly FTEs, then it may only claim the credit on wages/health plan expense paid for employees that were not working during the eligible time period. If the company had 100 or less employees, then it may claim the credit for all employees whether working or not.
The ERC is claimed on IRS form 941, “Employer’s Quarterly Payroll Tax Return.” An eligible company may reduce its federal employment tax deposits by the allowable ERC amount. If the ERC exceeds the remaining federal employment tax deposits for that quarter, the company may file Form 7200 to claim an advance refund.
In light of IRC Sec. 280E, if all of the requirements of the ERC are met, will a cannabis business be eligible for this credit?
Currently, most practitioners are operating as such: IRC Sec. 280E denies federal tax deductions and credits from gross income if a taxpayer is engaged in the business of the manufacture, distribution or sale of certain controlled substances classified as a Schedule I or Schedule II drug pursuant to the 1970 Controlled Substances Act. Cannabis is considered a Schedule I drug and therefore, any sales activity is considered trafficking under federal law. Therefore, IRC Sec. 280E prevents cannabis businesses from enjoying the benefit of otherwise ordinary business deductions.
However, IRC Sec. 280E is an income tax provision of the Internal Revenue Code and the ERC operates as a payroll tax credit. Additionally, the CARES Act did not specifically exclude the cannabis industry from claiming the ERC. Although ERC eligibility is not free from doubt and the IRS has not provided any guidance, there is a possibility that if the cannabis business meets all of the requirements of the ERC, the business may be eligible.
Watch for new and emerging discussion on this question. As always, consult with a tax professional with experience in the cannabis industry to investigate possible tax minimization.