Cannabis Businesses and the CARES Act Employee Retention Credit

Cannabis Apr 14, 2020 New York, NY

By: Rachel Gillette and James Mann, Partners

While cannabis businesses are excluded from most economic recovery packages related to COVID-19, these companies may still qualify for the employment tax credit. As usual with this industry, though, the fine points are surrounded by confusion, especially as it relates to Section 280E. Here’s our position.

The CARES Act employment tax credit is not disallowed by Section 280E — they’re in entirely different parts of the Internal Revenue Code that do not affect each other.

Section 2301 of the CARES Act provides for credits against employment taxes for employers that have been adversely affected by the coronavirus. The credits are for taxes imposed under Section 3221(a) of the Internal Revenue Code.

The Internal Revenue Code is Title 26 of the US Code, the federal laws of the United States. The Internal Revenue Code is divided into Subtitles — Subtitle A is income taxes, Subtitle B is estate taxes, Subtitle C is employment taxes, Subtitle D is miscellaneous excise taxes, and so on.

The credit affects the administration of Subtitle C — employment taxes. The way the act works is the employer gets a reduction in its employment taxes that it owes under Section 3111(a) of the Internal Revenue Code. Section 3111(a) imposes on every employer “an excise tax” (NOT an income tax) equal to a certain percentage of wages.

If the credit as calculated under the CARES Act is greater than the amount of employment taxes that would have been paid, then the credit becomes refundable — the government gives the employer a payment as if it had overpaid the employment tax. The normal payment of employment taxes is reflected on Form 941 — these amounts are not reflected on the corporate or other federal income tax returns of employers because they are not income taxes, they are excise taxes.

The laws regarding income taxes are found only in Subtitle A of the Internal Revenue Code. Subchapter B of Subtitle A deals with “Computation of Taxable Income,” and that’s where Section 280E is located. Section 280E disallows deductions and credits paid or incurred for carrying on certain trades or businesses, including cannabis trades or businesses. However, this disallowance of deductions and credits relates only to the deductions and credits in Subtitle A (“Income Taxes”).

The employment tax credit only has to do with taxes imposed under Subtitle C (“Employment Taxes”) so that credit is not subject to disallowance under Section 280E — Section 280E only concerns income taxes, not employment taxes.

It’s increasingly important to speak up about how cannabis businesses (and even businesses providing services to the cannabis industry), as “essential” businesses, taxpayers, and employers and have been left out of certain Federal relief packages resulting in unfair treatment of similar taxpayers affected by COVID-19.

Right now, several industry groups including the National Cannabis Industry Association are advocating for Congress to include cannabis businesses in the next COVID-19 Relief Bill. Click here to learn how to contact your elected officials, and as always, please reach out to our experienced cannabis tax attorneys to discuss your specific situation.

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