By: Ryan Glasco, CPA
Think your marijuana-related business doesn’t qualify for COVID-19 relief funds? Actually, it may.
Direct marijuana businesses – those that grow, produce, process, or distribute marijuana – as well as indirect businesses – those that derived any of its gross revenue from sales to direct marijuana businesses are ineligible to participate in the U.S. Small Business Administration’s Paycheck Protection Program (PPP).
However, as more states continue to legalize the use of marijuana, the Employee Retention Credit (ERC) has become an option for businesses operating in this industry to receive pandemic-relief funding.
The Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021, passed in December 2020 and March 2021, respectively, allow eligible businesses to apply for the ERC, a refundable payroll tax credit of up to $33,000 per employee on wages paid between March 13, 2020, and December 31, 2021.
Our team has compiled a high-level overview with frequently asked questions related to ERC program eligibility, which you can find here. You can also contact our team directly through our ERC Contact Form to get your process started.
While many companies do not think they qualify for the ERC and have found out they do, the biggest question among cannabis business owners is…
Will IRC Section 280E Affect My ERC Eligibility?
Even though it seems like a different state is passing or proposing legislation to legalize and/or decriminalize marijuana each day, the Federal government still considers marijuana an illegal substance, classified as a Schedule I drug under the Controlled Substances Act.
Given this classification, cannabis businesses must adhere to IRC 280E, which disallows businesses deductions and/or credits if they are in the trade or business of producing, manufacturing, or selling Schedule I or II drugs under the Controlled Substance Act.
However, IRC Sec 280E is a code section specific to income tax and does not apply to payroll tax. Since the ERC is strictly a payroll tax credit and is issued as a refund on an employer’s Form 941, businesses in the cannabis industry are eligible to claim the refund, assuming they meet the necessary qualifications. Click here to see if you’re eligible.
The IRS has not issued any specific guidance stating a cannabis business would be denied the ERC; however there always is a level of uncertainty, especially when credit programs are in their early stages. Please contact our ERC team or Cannabis Industry Group to determine your ERC eligibility.