Many cannabis business owners don’t believe they qualify for the Internal Revenue Service’s Coronavirus Aid, Relief, and Economic Security (CARES) credit program.
But they’re wrong.
The Employee Retention Credit (ERC), part of the CARES Act, provides employers a tax credit of up to $26,000 for any W-2 employee who was employed between 2020 and 2021. The program launched in March 2020 and is one of the first opportunities for cannabis businesses to apply federal aid to their operations.
Section 280E of the Internal Revenue Code expressly prohibits cannabis businesses from using ordinary business expenses to reduce their gross income and calculate their taxable income. Businesses still may deduct their limited cost of goods sold, but effective tax rates remain “70 percent or higher” without the ability to apply ordinary business deductions, according to the National Cannabis Industry Association. Any attempt to willingly circumvent 280E and evade taxes is punishable by significant fines, property liens and, in extreme cases, prison sentences.
With that in mind, cannabis companies have been shy about approaching the ERC, but Chief Executive Officer Gary Viramontes and his team at Guardian Banking Solutions are determined to guide as many businesses as possible through the process.
“In my daily meetings with cannabis operators, it came to my attention that most companies think they either cannot get the credit because the Paycheck Protection Program (PPP) wasn’t allowed thanks to 280E, or they don’t qualify because their revenue went up rather than down during the pandemic,” said Viramontes. “That’s just not the case, and it’s my mission to get the word out to the industry so companies can get the money owed to them. We’re talking about funds deposited directly into your account — not a loan, but a refundable tax credit.”
What is the ERC?
Any business, including those in the cannabis industry, is eligible to access the ERC as a payroll tax credit if it suffered specified financial harm during the pandemic.
The ERC is issued as a refund on an employer’s IRS Form 941, allowing businesses to claim qualified wages, including the expenses an employer paid to maintain a group health plan (as long as those expenses were not considered part of employees’ pay).
Since the ERC credit doesn’t count as income, a business won’t pay taxes on the funds received. The credit is a fully compliant blessing to cannabis — as long as employers know whether they qualify for it.
“Most relief funds are based on expenses [rather than impact], and the cannabis industry is harshly restricted on what they can expense. Operators just haven’t believed they could even entertain the ERC,” Viramontes said. “I recognized this as a major hole after processing clients’ paperwork, and I’m just trying to get that out so the cannabis industry knows they can take this fund.”
How to qualify for the ERC
Cannabis operators may qualify for the ERC for 2020 and 2021 if:
- They suffered a significant decline in revenue compared to the same quarter in 2019. (For 2020, the revenue decline must be equal to or greater than 50 percent; for 2021, it must be 20 percent or more).
- They fully or partially suspended operations to comply with a government order, as many businesses did during the pandemic. According to Viramontes, examples include:
- A retailer closing its doors but offering curbside service (partial suspension).
- A retailer with an open storefront but a mandatory restriction on the number of customers who could be inside at one time (partial suspension).
- A cultivation or manufacturing facility at which staff were required to work remotely (partial suspension).
- A laboratory that could not conduct research remotely (full suspension).
Essentially, Viramontes said, if a cannabis company had to alter the way it conducted business in any manner as a result of a pandemic-related government order, that company qualifies to apply for the ERC.
How to apply for the ERC
Guardian Banking Solutions has offered financial advice and assistance to the cannabis industry through some of its most difficult periods, but the company’s ERC support initiative may be one of its most popular efforts yet.
“One of the main things we do for ERC support is put together a free consultation call,” Viramontes said. “After that, we follow up with a free case analysis to ensure the client qualifies for the ERC in the first place. If they do, they can hire our firm to conduct the work behind the application and put it all together.
“An important thing for operators to know is they’ll need to get paperwork in order ahead of time,” he continued. “Down the road, the IRS might come back and start asking questions, so you’ll need to have that paperwork to support why you took the credit in the first place. That’s absolutely key. Anyone can say they want to apply for the ERC, but you’ve got to have the paperwork to back up your decision after the fact.”
The opportunity to apply for and receive federal aid implies similar opportunities down the line, he added, which is encouraging for an industry struggling through miniscule profit margins with price compression and saturation across the country.
Staying informed financially and legally, taking advantage of any available assistance, and keeping a paper trail of business decisions is of paramount importance in any highly regulated industry.
Guardian Banking Solutions’ years of experience working with cannabis operators is what informs this knowledge. In addition to providing ERC application assistance, the company provides payment processing, true PIN debit, insurance, bank direct payments, lending, and other banking solutions to an industry still on the hunt for a uniform approach to financial struggles.
Ultimately, Guardian Banking Solutions takes pride in flexibility. From payment processing and banking partnerships to lending and calculating tax credits, the company works with its clients to come up with realistic and sustainable solutions that help businesses grow, maximize revenue, and succeed in a highly competitive environment with little margin for error. As the industry continues to expand and evolve, Guardian Banking Solutions will continue to listen closely, tailoring its offerings to meet ever-changing and difficult-to-navigate financial hurdles as they crop up.