Who’s thinking about COVID-19 relief funds in 2023? If you own a cannabis-related business (CRB) like a dispensary, grow-op, or manufacture cannabis products, you should be. Why? Because many CRBs may be eligible for a very lucrative tax credit that’s worth up to $26,000 per employee – the Employee Retention Credit (ERC.)
Cannabis companies were originally prohibited from most economic recovery packages. But for the 2022 tax year, with no active PPP loans, the rules and regulations have changed. Meaning many CRBs can retroactively claim the ERC. However, the ERC credit has currently only been claimed by a small fraction of cannabis businesses. In this article, you’ll learn how to find out if your CRB qualifies for ERC credit to provide much-needed tax relief to the cannabis industry.
What Is The Employee Retention Credit (ERC)?
The Employee Retention Tax Credit (ERC or ERTC) was originally established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC was created to encourage private-sector business with employees and tax-exempt organizations to keep their staff on payroll during the coronavirus pandemic of 2020. At that time, ERC was only available to organizations which did not receive Paycheck Protection Program (PPP) loans.
The Consolidated Appropriations Act, approved in December 2020, retroactively removed the restriction against claiming the ERC if you had received a PPP loan (and expanded the credit in 2021.) Many businesses aren’t aware of this change, particularly in the cannabis industry, as most assumed prior ineligibility disqualified them from receiving ERC tax relief.
ERC Can Provide Up To a $26,000 Refund Per Employee
The ERC Program is a valuable tax credit that cannabusiness owners can now claim, as it is money that has already been paid to the IRS in payroll taxes for W2 employees. Depending on eligibility, cannabis business owners and companies can receive up to $26,000 per employee. ERC is based on the number of W2 employees your CRB had on its payroll in the 2020 and 2021 tax years.
How Is The ERC Calculated And Issued?
ERC credit is a refund that’s equivalent to 50-70% of the business’s qualified employee wages. However, businesses with fewer employees and less than 500 employees must meet additional conditions in various sections of 2020 and 2021. The minimum ERC credit is $5,000, with a maximum of $10,000 per employee per calendar quarter in 2021, and applies to wages from March 13, 2020 through December 31, 2021. The refundable credit can also be claimed retroactively on qualified health costs paid to employees. ERC is issued as a refund of the employer’s IRS Form 941, incentivizing employers who suffered financial losses due to pandemic-related disruptions and decreased revenues.
ERC Provides Critical Tax Relief For Cannabis Businesses
Cannabis companies were unable to qualify for PPP loans under IRS Section §280E, which prohibits deducting ordinary business expenses from gross income for the purpose of income tax. This is because while many states have legalized cannabis, it is still federally classified as illegal under the Controlled Substances Act, and thus, subject to §280E.However, the ERC is not classified as an income tax credit but rather a payroll tax credit since it is issued as a refund on an employer’s Form 941.
This distinction makes ERC relief available to cannabis businesses, both plant touching and ancillary. Payroll tax credit is exempt from IRC §280E. Since the credit is classified as a payroll tax credit, businesses that are in the cannabis industry and were otherwise ineligible of economic relief can claim the ERC refund if they meet all the qualifications. At present, the IRS has not yet issued any specific guidance that a cannabis business would be denied the ERC.
What Are The ERC Eligibility Requirements?
Congress has expanded the eligibility requirements numerous times through the CARES Act, Consolidated Appropriations Act, Infrastructure Investment and Jobs Bill, and the American Rescue Plan Act. Qualifications revolve around decreases in the percentage of gross receipts in calendar quarters compared to prior quarters, or businesses with forced closures or quarantines.
Cannabis employers are typically eligible, because government orders restricted their operations and in 2020, most cannabis businesses – especially plant-touching ones – weren’t eligible for PPP pandemic relief.
Employers must meet the following criteria to be eligible for employee retention credits:
Cannot have taken out a PPP loan
Non-plant-touching cannabis businesses who received a PPP loan can still qualify for the ERC, even if the loan has been forgiven.
Non-profit organizations are qualified for this relief and are exempt from the need for a considerable drop in gross income.
Employee retention credits are not available to governmental employers or self-employed persons who earn their own money.
Does My Canna-Biz Qualify for ERC?
Commons examples of cannabis business ERC credit qualification include, but are not limited to:
Capacity limits on the number of customers in waiting and/or service areas
Limitation of sales of pre-packaged goods
Orders prohibiting customers from being able to smell cannabis products for purchase
Orders allowing only curbside transactions
Mandated, time-consuming disinfection procedures
How To Apply for the Employee Retention Tax Credit
There is a three-year deadline from the date of your original filing to claim ERC retroactively. Because the eligibility requirements have changed frequently, it’s important to have a trusted tax professional or accounting pro, like Accountabis, by your side to navigate the ERC qualifications, complete all the required paperwork accurately, and receive the maximum amount you’re entitled to.
Proof of a temporary shutdown due to state or local orders
Proof of government-enforced curfews preventing employees from work
Proof of reduced hours of operations
Limitations on workers in storefront
Payroll tax returns
Proof of a decreased percentage of gross receipts in calendar quarters
Lines of business on Form 941
Mandated shutdowns for sanitation and disinfection procedures
The government caused a supply chain description, resulting in reduced operations
Limitations on access to your physical space
Limitations on size of gatherings impacting your business.
Cannabis ERC Resources
IRS Form 941
IRS Form 941-X (for a retroactive ERTC refund)
National Cannabis Industry Organization Service Solutions ERC webinar
Schedule Your Free Consultation With An Accountabis Advisor
Like most things related to cannabis tax and finance, calculating ERC credit can be complicated and make a major impact on your bottom line. It can be challenging to determine your eligibility and accurately calculate your tax credit, and the canna-biz has a history of IRS scrutiny.
Accountabis will help your CRB identify tax credits, file claims, prepare documentation, and successfully process your claim. We’ve built our reputation as a national leader for cannabis tax credit advisory, cannabis accounting, and financial best practices for cannabis entrepreneurs. Our experience with the cannabis industry and the ERC program makes us uniquely positioned to help your canna-biz get the most ERC relief you’re entitled to. Accountabis experts are ready to maximize your claim, so you don’t miss out on a refund worth hundreds of thousands of dollars.
Schedule a free Accountabis consultation today to see what amount of ERC tax credit your company qualifies for.