Cannabis businesses have it tough, despite record-breaking sales during the pandemic. They often try modernizing typical retail tactics to adhere to a nuanced and heavily regulated industry. There aren’t many chances to save money, and customers demand competitive pricing with the market expanding rapidly. So, we dived into the Employee Retention Tax Credit, an available tax deduction available to keep the cannabis industry climbing as high as the July 4th sales of this year.
While most government-sponsored tax credits and loans deny cannabis businesses the fiscal advantage, the Employee Retention Tax Credit (ERC) could indicate greener pastures. In response to the pandemic, the IRS sent White House-ordered relief in all forms to help companies and individuals make it through challenging times. There was the PPP for small businesses, personal checks and tax credits for individuals and families, and now the Employee Retention Tax Credit for all businesses (yes, even cannabis businesses!) to make payroll.
Most cannabis businesses weren’t eligible for pandemic relief like the PPP (Paycheck Protection Program and Loan Forgiveness), specifically if the companies were plant-touching. Thanks to the 2018 Farm Bill, hemp and some ancillary cannabis businesses were eligible for PPP. Don’t worry: If you are a non-plant-touching cannabis business and received a PPP loan, you can still qualify for the Employee Retention Tax Credit–even if your loan was forgiven.
Since most pandemic resource programs have already ended, you may think this is a shot in the dark. Fortunately, it’s not! So why leave money (or credits) on the table?
The CARES Act established the ERC for any private-sector business with employees and for tax-exempt organizations that operated in 2020. If your company experienced a significant decline in gross earnings in 2020-2021 or a pandemic-related pause in services compared to 2019, you could qualify.
The credit is a refund equivalent to 50-70% of qualified employee wages (limited to a maximum of $10,000 per employee per calendar quarter in 2021) paid from March 13, 2020 and December 31, 2021. Congress has expanded the eligibility requirements for the ERC several times, so work with a trusted tax professional to ensure you’re getting the full benefit of this credit.
As ERC Today explains, you have three years to claim this credit that runs from 2020-2021:
“…You can still take advantage of the employee retention tax credits if your business is eligible. If you didn’t previously file for the credit, you may file for a retroactive ERTC refund. To file retroactive you submit an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X. There is a three-year deadline from the date of your original filing.”
Those who are cannabis tax-savvy already may be wondering if Internal Revenue Code (IRC) Section 280E would interfere with your business being able to qualify. 280E is a tax code blocking cannabis businesses from deducting typical business expenses because cannabis is still a Schedule 1 substance. However, there is good news once again. 280E only prohibits cannabis businesses from deductions and credits on income tax. ERC is a payroll tax credit and, therefore, isn’t banned. Marijuana Ventures explains the legitimacy of this once-in-a-lifetime cannabis business credit in their piece, “Potential COVID Relief for Cannabis Businesses?”:
“Since ERC is a payroll tax credit taken against an employer’s share of Social Security tax and is claimed on an employer’s Form 941 (payroll tax return), businesses in the cannabis industry may be eligible to claim the refund, assuming they meet the necessary ERC qualifications set forth by the IRS.”
The antiquated 280E lives in a separate code of the IRC, and experts are transparent that the ERC doesn’t include any cannabis-specific language. Since cannabis businesses were deemed essential during the lockdown, be sure to verify your revenue qualifications during the height of the pandemic and then start raking in the credits.
The Cannabis Industry Journal drops some hefty figures of what you could be getting back in their article “Don’t Go Down with the Ship: How to Create a Cash Influx for Your Cannabis Business During Hard Times.” They’ve heard cannabis manufacturing and retail success stories of receiving up to $26,000 per employee during that period:
“Many cannabis business owners would be surprised to learn that they can still take advantage of the employee retention credit program that started during the pandemic… But, even this year, cannabis business owners can seek cash relief through ERC–employers can retroactively claim the ERC based on financial struggles they experienced during 2020 and the first three quarters of 2021. Started your cannabis business after February 2020? You still may qualify under specific ERC provisions that can provide up to $100,000 in refundable credits.”
The six-figure payout is referring to a certain stipulation: a “recovery startup” which is a business defined as launching after February 15, 2020, with annual gross receipts of $1 million or less with an ERC cap of $50,000.
Companies can apply for the ERC themselves. However, we suggest consulting a trusted tax professional to ensure you complete all the required paperwork accurately and receive the maximum amount you’re entitled to.
It can be helpful to file each period separately because each period can have slightly different requirements and benefits based on the changes passed by Congress over time. Also, you will save yourself some time by having your quarterly revenue summary, quarterly payroll tax returns, and employee payroll records by date prepared ahead of time according to each period.
When you’re ready to apply, complete Form 941-X to retroactively claim your credit.
This article was written for informational purposes only and should not be considered financial advice.
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