Owners of cannabis businesses often find themselves disappointed and angrier as time goes on with the US Tax Code when tax returns are sent in. With the US Tax Code and Internal Revenue Code (IRC), the devil is always in the details. A small provision in Section 280E of the IRC notes that cannabis businesses are not able to claim any business expense deductions under the Tax Code. In turn, this results in effective tax rates that often balloon past 80% for many businesses that are already being pummeled by regulatory scrutiny. Cannabis businesses will be affected by this provision in the Tax Code until cannabis is legalized at the federal level.
The Good News
While cannabis businesses were not able to participate in the U.S. Small Business Administration's Paycheck Protection Program (PPP), these businesses are eligible for the Employee Retention Credit (ERC). The ERC is a refundable credit on payroll taxes owed by a business. The elephant in the room is none other than Section 280E. The good news is the ERC is not blocked by the provision because it is a payroll tax credit. Given that Section 280E prevents cannabis businesses from deductions and credits, this is only true on the company's income taxes. The distinction is small in nature but the difference is real. Payroll taxes reside in a different section of the IRC and Section 280E does not apply to said taxes. If a cannabis business meets one of the qualifying criteria for the ERC, it should apply for the credit immediately.
The Way Forward
As more states continue to legalize the use of cannabis, the ERC has become a viable option for businesses operating in the industry to receive pandemic-relief funding. The cash refund the credit generates has helped scores of businesses weather the economic impact of the pandemic. The credit provides up to $5,000 per employee in refundable tax relief for 2020. For 2021, the incentive increased to $7,000 per employee per quarter in refundable tax relief. The IRS is responsible for issuing the cash refunds that come in the form of checks from the US Treasury. Given the numbers, it is easy to see how credits can quickly reach 6-figures and in some cases, fall into the 7-figure territory.
What's Next?
In practice, ERT Credit has found that an extremely diverse range of businesses are excellent candidates for the ERC. For many business owners and managers of non-profits, the ERC remains the go-to relief as it relates to the pandemic and one of the last sources of a cash injection that is helping businesses stay afloat. Yet hundreds of thousands of businesses and non-profit organizations around the country are failing to take advantage of the ERC. Billions of dollars are available for businesses and non-profit organizations to both retain and hire new employees. But you must apply.
As leaders in the market, ERT Credit has provided maximized computations to over one thousand employers across the country. See how ERT Credit can help you today by clicking here. No risk, no obligation - pay when you get paid.
