May 5, 2022

Cannabis Businesses Can Still Find Cash Relief via Employee Retention Credit

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Cannabis companies were significantly impacted during the pandemic. Many facilities remained open for the duration of the pandemic as “essential” businesses, but experienced partial governmental shutdown of certain services. And while other businesses were eligible for the SBA funded and administered Paycheck Protection Program (PPP), cannabis businesses were excluded from PPP relief since cannabis cultivation and sales are still not legal under Federal law. Simply, even state-legal cannabis businesses were unable to affirm on the SBA PPP application that their operations do not violate federal law. 

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But alternative relief was made available during the pandemic and still exists! Cannabis businesses that experienced fully or partially suspended operations due to pandemic-related governmental orders still have the opportunity to access cash relief in a refundable employee payroll tax credit—the Employee Retention Credit (ERC). The ERC, as a payroll tax credit, doesn’t implicate Internal Revenue Code §280E—which prohibits cannabis businesses from deducting ordinary business expenses from gross income. Rather, the ERC is a payroll tax credit which results in a refund on the employer’s Form 941. With credits often exceeding the initial payroll tax liabilities themselves, the ERC has already awarded millions of dollars to a broad spectrum of employers, including cannabis businesses. 

Launched in March 2020, the ERC remains one of the biggest relief opportunities—up to $26,000 per employee during 2020 and 2021—available to businesses that have been negatively impacted by the COVID-19 pandemic. And even for those businesses already beginning to recover, employers can retroactively claim the ERC based on hardships experienced during 2020 and the first three quarters of 2021.

Employers should also remember that cannabis businesses that started up after February 2020 may qualify under specific ERC provisions that can provide up to $100,000 in refundable credits in 2021.

ERC Eligibility

Employers in cannabis industry are typically eligible, because government orders restricted their operations. 

Commons examples include, but are not limited to:

  • capacity limitations on the number of individuals in their waiting or service 
  • orders prohibiting “deli-style” sales 
  • orders prohibiting sniff jars 
  • orders permitting only curbside transactions and delivery  
  • mandated time-consuming disinfecting procedures

*Note that orders creating qualifying partial suspensions were more common than many employers and tax practitioners realize.

Another way for employers in the cannabis industry to be eligible is by showing that the business suffered a reduction in gross receipts.

  1. Tax Year 2021 (Quarters 1, 2, and 3):
Employer is eligible if business’s gross receipts are more than 20% down from the gross receipts in the same calendar quarter of 2019.

   2. Tax Year 2020 (Quarters 1 through 4):

Employer is eligible if business’s gross receipts are more than 50% down from the gross receipts in the same calendar quarter of 2019.

Conclusion

Whether or not Congress implements other forms of pandemic related relief for the cannabis industry, the ERC remains available now. Numerous government orders restricted a broad range of ordinary business operations in the industry—and you may be one of many employers entitled to substantial cash benefits. If you operate a cannabis business, don’t wait to find out if you qualify! Contact our team at (410) 497-5947 or schedule your free evaluation with our team HERE.

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