With every tax return sent to the IRS, owners of cannabis businesses find themselves angrier and more disappointed with the United States Tax Code (Tax Code) and the Internal Revenue Code (IRC). This frustration stems from a simple, small provision in Section 280E of the IRC: cannabis businesses may not claim any business expense deductions under the Tax Code, resulting in effective tax rates of 80% or higher for many businesses already subject to intense regulatory scrutiny. Multiple lobbying efforts over the past decade have all failed to remove or abate Section 280E, and the provision seems likely to affect cannabis businesses unless and until marijuana is legalized at the federal level.
Section 280E’s ruthless application and seemingly intractable nature have left state-legal cannabis businesses wary of all dealings with the IRS. The Small Business Administration (SBA) has been no less hostile to cannabis businesses, though less actively antagonistic – the SBA does not financially burden cannabis businesses, but it roundly refuses to extend any program benefits to the industry. It is no surprise, then, that cannabis businesses have by and large avoided taking advantage of the federal business assistance provisions of the COVID-19 relief packages passed by Congress over the past year. However, if a cannabis business qualifies for the following credits, filing an application may, finally, result in a positive interaction between the cannabis industry and government services.
1. Employee Retention Credit:
The Employee Retention Credit (ERC) is a refundable credit on payroll taxes owed by a business. The catch is that, in order to qualify for the credit in one or both of the first two quarters of 2021, a business must either experience a revenue decline of greater than 20% compared to the corresponding quarter in 2019 or see its operations fully or partially suspended due to government orders related to the COVID-19 response. Most cannabis businesses actually saw an increase in business during the pandemic and therefore would not qualify for the ERC.
The ERC is not blocked by Section 280E because it is a payroll tax credit, while 280E prevents deductions and credits on a cannabis company’s income taxes only. The distinction is slight but the difference is real; with payroll taxes in a different section of the IRC, Section 280E does not apply to them. If a cannabis business meets one of the qualifying criteria, it should apply for this benefit as a way to retain employees without as much of a burden on the business’s finances.
For more information, including eligibility requirements and instructions on how to claim the ERC, the IRS maintains a page here.
2. State Small Business Credit Initiative
The State Small Business Credit Initiative (SSBCI) has existed since 2010, but was recently supercharged by the American Rescue Plan Act (ARPA). Ten billion dollars were earmarked by the ARPA for the SSBCI, which will be disbursed to state governments for grants to small businesses, businesses owned by members of socially or economically disadvantaged groups, and “very small” businesses.
While the funds in the SSBCI are federal, they are ultimately distributed under state rules. Therefore, state-legal cannabis businesses may be able to successfully apply for SSBCI support.
The United States Treasury announced the apportionment of the $10 billion among the states on April 9, 2021, including large grants to states that have legalized cannabis. Colorado, for example, received approximately $75 million, California just shy of $900 million, Washington nearly $125 million, and Oregon just over $56 million. The states will have the ability to provide that money to businesses that qualify for state programs. So long as cannabis businesses do not make any false statements on the state application, they should be able to receive those funds if they qualify, regardless of federal prohibitions on the sale of marijuana.
A Word of Caution on PPP Loans:
PPP Loans, the common name for the Paycheck Protection Program loans first available in early 2020 and extended by the American Rescue Act, are possibly the most discussed and well-known provision for businesses across all three COVID-19 relief packages. PPP Loans are forgivable loans available to certain small businesses to continue paying their employees. While many cannabis businesses would otherwise qualify for these loans (and certain online articles urge them to apply), we strongly recommend that any plant-touching cannabis business avoid applying for a PPP Loan.
What is the problem? Well, unlike the two items mentioned above, the PPP Loan program is administered by the Small Business Administration (“SBA”), which has its own application process. The application requires an applicant to expressly affirm that the applicant is not in violation of federal law under penalty of perjury. Because all state-legal marijuana businesses are in violation of federal law, they cannot truthfully make the required affirmations on the application.
As with all interactions between cannabis businesses and the government, applying for relief funds can be a complicated process. With the Employee Retention Credit and State Small Business Credit Initiative, however, struggling cannabis businesses may finally find themselves lifted up by government agencies rather than further burdened.
Fortis Law Partners is well equipped to leverage our comprehensive legal expertise for the benefit of clients in the cannabis industry. We understand the complexities of the rapidly evolving regulatory requirements, and can deftly advise on a variety of matters that impact cannabis businesses.
Our associated company, Full Velocity Consulting, also advises participants in today’s cannabis marketplace, providing strategic consulting, CFO services, accounting services and regulatory compliance advice.
