Note: Article originally published on MJBizDaily by Jeff Smith. Click here to read on MJBizDaily.com.
Many states have declared cannabis companies “essential businesses” during the COVID-19 pandemic and allowed them to maintain operations, but the U.S. Congress and President Donald Drumpf don’t appear to see the industry as fundamental.
They have barred state-legal marijuana businesses and most ancillary cannabis companies from receiving grants or low-interest loans through the newly enacted $2 trillion federal stimulus package and related bills.
The move denies a financial lifeline to cannabis businesses up and down the supply chain at a time many are struggling financially and cutting employees.
A possible silver lining exists, though. One of the industry’s foremost tax specialists believes that many cannabis companies should qualify for payroll tax credits.
Still, industry officials and advocates aren’t happy about the situation, noting that cannabis companies must comply with federal mandates such as paying extended sick time but are excluded from receiving economic relief.
“In my opinion, it is just ludicrous,” said cannabis tax specialist and certified public accountant Dean Guske, managing director of Guske & Co. in Bellevue, Washington.
“The purpose of the loans is to keep people employed. To penalize cannabis companies and the employees who work for them is wrong and unfair.”
“It’s a major blow to the industry for sure,” said Josh Kappel, founding partner of the Vicente Sederberg law firm in Denver.
Codie Sanchez, managing director of the Dallas-based private equity firm Entourage Effect Capital noted: “We think it’s inappropriate for the government not to include a business they now deem as essential.”
‘Direct’ and ‘indirect’ MJ businesses blocked
Vicente Sederberg was “teed up and ready to apply” for economic relief when the U.S. Small Business Administration came out with regulations on April 2, the eve of the program’s launch.
But those regulations specifically barred “direct” and “indirect” marijuana businesses from obtaining loans and defined an indirect business as one that “derived any of its gross revenue for the previous year” from sales to direct marijuana companies.
“We felt it was too risky to apply for the loan without further analysis or guidance,” Kappel said.
Can some ancillary marijuana businesses qualify?
Certain ancillary businesses might qualify for relief, and that likely depends on whether companies can certify on the application that they are not an “indirect marijuana business” and are not engaged in activity that violates federal, state or local law, Kappel said.
For example, the SBA indicated that a plumber or tech-support company that did work for a marijuana company could qualify.
Sanchez recommends that ancillary companies speak with legal experts, but the ones she’s talked with don’t see anything that would explicitly punish an ancillary company from applying for economic relief.
The worst-case scenario, she said, would be that a loan application isn’t approved or that it’s approved and then later pulled back.
Potential speed bumps
But Vicente Sederberg suggested that even ancillary businesses that might technically qualify for relief could “encounter challenges” in receiving funds given that many banks won’t serve cannabis-related businesses.
For some of the relief funds, such as the so-called paycheck protection program, applicants work directly with participating lenders.
The situation appears better on the tax front.
Guske said his firm’s preliminary position is that payroll tax credits are available to the cannabis industry.
Guske added that 280E – the section of the Internal Revenue Code that bars cannabis companies from taking business deductions – is an income tax section.
Credits relating to payroll taxes are part of a different section of the tax code, he said.
There are some complicating factors, Guske said.
Employers can take the Employee Retention Credit – a payroll tax credit equal to 50% of employee wages up to $10,000 of wages – only if their operations were fully or partly suspended by coronavirus-related shutdown orders, or businesses that experience at least a 50% decline in gross receipts compared to the same quarter a year ago.
Guske advises cannabis companies to talk with their accountant about their individual cases.
CARES Act provisions
The following is a summary of several provisions of the Coronavirus Aid, Relief and Economic Security Act and how cannabis companies and ancillary businesses are affected.
- Extended sick pay: All employers, including cannabis companies, are required to pay two weeks of sick leave to workers who need time off to take care of themselves or other family members. The U.S. Department of Labor can make an exception to businesses with fewer than 50 employees if the policies threaten their viability. Guske said he believes cannabis companies would qualify for tax credits for paying the sick leave.
- SBA Economic Injury Disaster Loan program: Cannabis and most ancillary companies appear to be disqualified from receiving these low-interest loans designed to cover business expenses.
- Paycheck protection program: The funds are intended to cover eight weeks of a company’s payroll costs to help businesses retain workers. Some ancillary cannabis businesses might qualify. The loans are made directly through participating lenders, so the first place to start if you think you qualify is with your bank and/or attorney, Kappel said.
- Payroll tax-payment deferrals: Cannabis and ancillary businesses should be able to take advantage of a provision to defer payment of their share of Social Security taxes until 2021 and 2022.
A coalition of industry groups is still fighting to include cannabis companies and ancillary businesses in coronavirus-related, economic-recovery packages.
Democrats are especially pushing for large amounts of additional emergency funds for small businesses and individuals.
The marijuana industry coalition, which includes the National Cannabis Industry Association, recently requested to congressional leaders that the industry be “treated on an equal level as other job-generating, tax-paying companies in the country.”