How To Apply for ERC as a Cannabis Business
BusinessIn the competitive cannabis industry, every opportunity for financial growth is worth exploring. Yet, amid the challenges and complexities, one valuable but often overlooked resource is the Employee Retention Credit (ERC). This refundable tax credit, designed to alleviate employment tax burdens, could hold the key to unexpected financial support for your cannabis business expansion.
This article will break down the details of the credit program and show you how it can benefit your bottom line and provide financial stability for your cannabis business. You’ll also learn how to apply for ERC as a cannabis business.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a federal tax credit introduced as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide financial relief to employers during the COVID-19 pandemic. The credit is designed to encourage employers to retain their employees by offering a tax incentive. Here’s a breakdown of how it works and how it can be used for a cannabis business:
Credit amount
The ERTC provides a tax credit equal to 50% of eligible wages paid by an employer. These wages are capped at a maximum of $10,000 per employee for each calendar quarter.
a. The business was fully or partially suspended because of government orders related to COVID-19. For example, if a cannabis retail dispensary had to temporarily close or reduce operations because of lockdown measures, it would likely qualify.
b. The business experienced a significant decline in gross receipts. Specifically, if the business’s gross receipts for a calendar quarter in 2020 were less than 50% of the gross receipts for the same quarter in 2019, it may be eligible. For a cannabis business owner, this decline could be because of reduced sales or disruptions caused by the pandemic.
Size of the business
The ERTC is particularly beneficial for smaller businesses. Employers with fewer than 100 full-time employees can claim the credit for all wages paid, whether the employees are working or not. Larger employers can only claim the credit for wages paid to employees who are not working for the reasons mentioned above.
Why the Employee Retention Credit Is Valuable for Cannabis Businesses
The ERTC holds significant value for cannabis businesses, primarily because of the challenges they face in a heavily regulated industry. Here’s why the ERTC is particularly valuable for cannabis businesses:
Regulatory Hurdles and Compliance Costs
Cannabis businesses operate in a complex regulatory environment. Complying with these regulations often requires substantial financial resources. The ERTC can provide much-needed financial relief by reducing employment tax liabilities, allowing cannabis companies to allocate funds to compliance efforts rather than tax obligations.
Cash-Flow Constraints
The cannabis industry is capital-intensive, with significant upfront costs related to cultivation, production and distribution. Many cannabis businesses struggle with cash-flow constraints, making it challenging to invest in growth initiatives or meet customer demands promptly. The ERTC offers a direct infusion of capital through tax credits, enabling these businesses to improve cash flow and expand operations when needed.
Economic Uncertainty
The cannabis industry experienced economic uncertainty during the COVID-19 pandemic. Business disruptions, lockdowns and fluctuations in consumer behavior posed additional challenges. The ERTC was introduced as a response to these uncertainties, offering financial support to cannabis businesses during times of crisis.
Support for Small and Medium-Sized Enterprises
Many cannabis businesses fall into the category of small or medium-sized enterprises (SMEs). The ERTC is particularly favorable for SMEs as it allows them to claim the credit for all wages paid, regardless of whether employees are working, provided they meet the eligibility requirements. This can significantly benefit cannabis startups and smaller operators with limited resources.
ERC Qualification Requirements
To qualify for the ERC, businesses must meet specific requirements, which include:
Eligible Employer Status
The ERC is available to employers, including tax-exempt organizations, that have experienced either of the following during a designated period:
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The business was fully or partially suspended because of government orders related to COVID-19. For instance, if lockdown measures required a cannabis dispensary to temporarily close or reduce operations, it would likely meet this criterion.
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The business experienced a significant decline in gross receipts. If the business’s gross receipts for a calendar quarter in 2020 or 2021 were less than 50% of the gross receipts for the same quarter in 2019, it may be eligible. This decline in revenue could be the result of reduced sales or other disruptions caused by the pandemic.
Qualified Wages
The ERC is calculated based on qualified wages paid to employees during the eligible periods. Qualified wages vary depending on the size of the employer:
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For businesses with fewer than 100 full-time employees, all wages paid during the eligible periods qualify, whether the employees were working or not.
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For larger employers — those with 100 or more full-time employees — qualified wages are limited to wages paid to employees who are not providing services because of COVID-19-related circumstances.
Claiming the credit: To claim the ERC, eligible employers must report their qualified wages and the related health plan expenses on their quarterly payroll tax refund, typically using Form 941.
Certification: Businesses receiving Paycheck Protection Program (PPP) loans may also qualify for the ERC, but they cannot claim the credit for the same wages used to qualify for PPP loan forgiveness.
Tax Code 280E
Internal Revenue Code Section 280E (IRC 280E):
IRC 280E is a tax code provision that significantly impacts businesses engaged in the sale of controlled substances, including cannabis. It disallows certain deductions and credits for businesses that traffic in Schedule I or Schedule II controlled substances under the Controlled Substances Act, which includes marijuana.
This means cannabis businesses cannot claim many standard business deductions available to other types of businesses, such as deductions for advertising, rent and utilities. Consequently, IRC 280E can result in higher federal income tax liability for cannabis businesses.
Employee Retention Credit
The ERC is a separate provision introduced under the CARES Act expanded by subsequent legislation, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. It is designed to provide financial relief to employers facing economic hardships during the COVID-19 pandemic by offering a payroll tax credit.
The ERC is a payroll tax credit, not an income tax deduction or credit. This means it operates independently of IRC 280E, which affects income tax liability. The ERC is based on eligible wages paid to employees and the business’s eligibility criteria.
*Note: While IRC 280E restricts the ability of cannabis businesses to claim certain income tax deductions, it does not impact their eligibility to receive the Employee Retention Credit. The ERC is a payroll tax credit available to eligible employers based on specific criteria related to COVID-19’s economic impact. Cannabis businesses that meet the ERC requirements can still benefit from the credit to offset their payroll taxes liabilities, regardless of the limitations imposed by IRC 280E.
How Cannabis Business Owners Can Apply for ERC
Applying for the ERC as a cannabis company involves several steps to ensure you maximize the benefits of this valuable tax credit. Here’s a simplified guide on how to apply:
1. Determine eligibility: First, assess whether your cannabis business meets the eligibility criteria for the ERC, as outlined in previous responses. Ensure you qualify based on factors such as gross receipts decline or business suspension because of COVID-19.
2. Gather documentation: Collect necessary documentation to support your ERC claim, including records of qualified wages paid to employees during eligible quarters, health plan expenses and evidence of any government orders that impacted your business operations.
3. Calculate the credit: Use the IRS guidelines and formulas to calculate the amount of ERC your business is eligible to claim based on qualified wages and other relevant factors. This may require the assistance of a tax professional familiar with the ERC.
4. Report on payroll tax returns: To claim the ERC, report it on your quarterly payroll tax returns, typically using Form 941 for eligible quarters. Clearly document the credit amount and any other required information.
5. Review and file: Carefully review your payroll tax filings to ensure accuracy and compliance with ERC requirements. If you have any doubts or questions, consider seeking professional advice from a tax specialist or accountant.
6. File retroactively: Keep in mind that eligible employers can retroactively file for the ERC for the 2020 and 2021 tax years until April 15, 2024, and April 15, 2025.
To make the employee retention tax credit application process even more straightforward for cannabis companies, you can use Canna Business Resources (CBR), which specializes in assisting cannabis businesses with tax incentives and financial support during challenging times. CBR offers an easy-to-use form fill available on its website that streamlines the ERC application process.
ERTC Intake Form
ERTC Intake Form
Cannabis Funding Opportunity Through the Power of ERTC
The Employee Retention Credit represents money already earned through the retention of employees — an asset often overlooked in the quest for financial stability. For cannabis businesses, it’s not merely a tax credit; it’s a lifeline to the resources needed to navigate the complexities of the industry, foster growth and ensure compliance. Instead of seeking loans, cannabis entrepreneurs can harness the power of the ERTC, unlocking the funds they’ve rightfully earned and securing a brighter future for their ventures.
Canna Business Resources can provide expert guidance on navigating the ERTC application process, ensuring you maximize your credit. Plus, if you need immediate financial support, CBR’s bridge loan options can bridge the gap until your ERTC credit comes through. Don’t miss out on the funds you’ve earned and the opportunities that await in the cannabis industry — take action today with Canna Business Resources.
Frequently Asked Questions
Q: How many employees do you need to get ERC?
A: The number of employees isn’t a deal-breaker. Smaller businesses can claim for all wages and larger ones for certain employees.
Q: How much does it cost to apply for ERC?
A: Applying for the ERC won’t dent your wallet. It’s a financial relief program, not an expense.
Q: Can cannabis companies apply for ERC?
A: Cannabis companies that meet the criteria can tap into the Employee Retention Credit. It’s not off-limits.
