Coronavirus and Federal Payroll Tax Credits: Relief Available for Cannabis Companies
The cannabis industry rarely looks to the federal government for support. Yet the raft of fiscal relief addressing COVID-19 has caused some in the industry to wonder what options, if any, might be available for them.
Although cannabis companies are ineligible to participate in the Paycheck Protection Program (PPP) under the CARES Act, both the CARES Act and Families First Coronavirus Response Act include provisions that may be available to reduce employer payroll tax liability for cannabis companies through certain deferrals and credits. Indeed, absent further federal guidance to the contrary, these tax benefits should be available to cannabis businesses.
The Acts Each Provide Credits That Can Reach $5,000+ Per Employee
The Families First and CARES Acts (the Acts) both provide tax incentives for employers to aid them in maintaining sufficient cash-flow to endure the economic and public health impacts of the COVID-19 pandemic.
- Sections 7001 and 7003 of the Families First Act provide businesses with tax credits to cover certain costs of providing employees with expanded family and medical leave and required paid sick leave related to COVID-19 from April 1, 2020 through December 31, 2020.
- Section 2301 of the CARES Act encourages Eligible Employers to keep employees on their payroll despite experiencing economic hardship related to COVID-19.
“Eligible employers” include those (a) shuttered by government authorities for any period due to COVID-19; or (b) whose gross receipts in any quarter in 2020 are below 50% when compared to the gross receipts of the same quarter in 2019. Self-employed persons may only claim the credit with respect to wages they pay to their employees. Self-employed earnings are ineligible for the credit.
Employers can only claim one of the two credits for any given wage payment (e.g., wages for which an employer may claim the Employee Retention Credit (explained below) does not include sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act). Nevertheless, if an employer pays both type of wages, it can combine the credits for maximal benefit to reduce its overall payroll tax liabilities.
Both tax credits are fully refundable under these acts, meaning if the amount of the credit is more than the applicable payroll taxes owed by the employer, the employer will get a refund when it files its quarterly payroll tax return. If the employer does not wish to wait, then in anticipation of receiving these credits, the employer may keep payroll tax withholdings that otherwise would need to be deposited with the IRS. If those withholdings are less than the amount of the expected future tax credits, the employer may request an advance of the difference between the credits and the retained withholdings from the IRS.
Credits Under Families First Act
What is the credit and who qualifies?
The credit allows employers to use those expenses related to providing paid sick and expanded family and medical leave, including Medicare taxes and Qualified Health Plan expenses allocable to such wages, against the employer’s 6.2% portion of Social Security taxes. It is available to most employers with fewer than 500 employees that pay “qualified sick leave wages” and “qualified family leave wages,” to their employees, which are described here.
Are there any limitations for these credits?
Yes. For paid sick leave, the maximum credit allowed is $5,110 per employee for up to ten days (80 hours). For paid family leave to care for someone with coronavirus, the maximum credit allowed is $2,000 per employee, for up to two weeks (80 hours). For paid family leave to care for children due to coronavirus-related school or daycare closures, the maximum credit allowed is $10,000 per employee, for up to ten weeks.
Credits Under CARES Act
What is the credit and who qualifies?
The “Employee Retention Credit” is a fully refundable tax credit equal to 50% of “qualified wages” (including allocable qualified health plan expenses) that Eligible Employers pay their employees. It is available to Eligible Employers’ businesses that fully or partially suspended operations due to COVID-19 or that experience a significant decline in gross receipts as set forth above.
Are there any limitations for these credits?
Yes. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so the maximum credit for an Eligible Employer’s qualified wages paid to any employee is $5,000 for the entire calendar year.
The CARES Act Also Allows Employers To Defer Their Full Social Security Tax Burden
Section 2302 of the CARES Act also allows employers and self-employed persons to defer the deposit and payment of the employer’s share of Social Security and certain Railroad Retirement taxes, and 50% of self-employment taxes. Persons who qualify for this deferral are relieved from penalties generally imposed for failure to deposit employment taxes, in accordance with the timeframes and amounts required by Sections 6656 and 6302 of the Internal Revenue Code, respectively. This deferral is in addition to the relief provided by the tax credits described above and applies from March 27, 2020 through December 31, 2020. Employers may defer 50% of their qualifying 2020 taxes until December 31, 2021, and the remaining 50% until December 31, 2022. Self-employed individuals, by contrast, may only defer 50% of their qualifying self-employment tax liability across those two years. The ability to defer the employer’s share of Social Security taxes applies to all employers, whether or not they are eligible for the paid leave and employee retention credits. The only explicit limitation is for recipients of loan forgiveness under any other CARES Act provision, such as the PPP loan, which is inapplicable here.
For example, an employer who uses the maximum credits provided by both the Families First Coronavirus Response and CARES Acts for an employee, and who has an $8,000 Social Security tax liability in 2020, may defer payment and pay $4,000 of that tax liability by December 31, 2021 and the other $4,000 by December 31, 2022. A self-employed person may do the same, but only defer 50% of the self-employment tax. A self-employed person who owes $8,000 of Social Security tax liability can only defer $2,000 until December 31, 2021, and the remaining $2,000 until December 31, 2022.
The credits and deferral discussed above can be used together, as long as, as explained above, the credits are used for separate wages. In effect, the acts allow employers to retain cash-flow immediately because, in anticipation of receiving the tax credits, the employer can retain payroll tax withholdings that otherwise would be required to be deposited with the IRS and request an advance if those retained withholdings are less than the expected credit. Further, if the employer would owe their portion of Social Security taxes after taking the credit into effect, they can defer paying half of this tax until the end of this year and half until the end of next year requesting an advance payments of these credits.
Risk/Benefit Considerations For Cannabis Companies
Uncertainty remains as to the federal government’s position, but the Acts do not explicitly exclude cannabis companies from these tax perks. Skeptics of the laws’ applicability to the industry argue that cannabis companies are disallowed from taking any federal credits or deductions, per Section 280E of the Internal Revenue Code. However, Section 280E does not apply to employment payroll taxes because the provision is in the income tax section of the Code. Additionally, these tax incentives do not funnel money from the federal government to the cannabis companies, like the PPP loans, but instead allow employers access to capital that would have otherwise been paid to the federal government to be used for the newly created federal programs for coronavirus relief. Under this reasoning, Section 280E applies specifically to income taxes, but not to federal payroll taxes referenced in the CARES and Families First Coronavirus Response acts. Should the IRS conclude that Section 280E applies to payroll taxes and bar cannabis companies from benefitting from the new employer credit and deferral programs, cannabis companies would be subject to the previously existing rules for employment tax deposits (generally deposited on a monthly or semi-weekly schedule). Typically, employers face a penalty of up to 10% of the taxes owed or equal to the amount of the underpayment, unless the employer can show that the failure was due to reasonable cause and not willful neglect, per Section 6656 of the Code. This risk may be mitigated with an explanation to the IRS.
Each cannabis company considering availing itself of the Acts should thus conduct its own cost-benefit analysis, informed by how much it stands to gain and lose by taking the risk. Although the IRS has published guidance for the new employer tax credits under both the Families First and CARES Acts, there is no mention of cannabis employers being excluded from this relief. As employers begin to implement these tax credits, it is foreseeable that the IRS will – at some point – provide guidance for cannabis companies, but the timing and content of that guidance is unknown. Until that time comes, employers in the cannabis industry may want to consider seeking the tax benefits described above. For all these reasons, it is highly advisable to consult with a cannabis lawyer before taking action.