Employee Retention Credit Refunds:
What Cannabis Operators Need to Know
CannaBlog by Calvin Shannon, CPA, CVA, President of Bridge West CPAs
The Employee Retention Credit (ERC) has proven to be a valuable resource for businesses during the challenging economic climate of recent years. As the cannabis industry continues to emerge and evolve, understanding the nuances of tax regulations such as the ERC becomes increasingly crucial.
The ERC, part of the CARES Act introduced in 2020, is a fully refundable tax credit designed to incentivize employers to retain their workforce during the COVID-19 pandemic. While initially, the cannabis industry faced uncertainties regarding their eligibility due to federal prohibition, the IRS eventually clarified that state-legal cannabis businesses could qualify for this credit.
However, the nuances of these ERC refunds have raised some significant tax considerations for businesses, specifically concerning their inclusion in taxable income and the potential need to amend prior tax returns.
The IRS has clarified that ERC refunds should be considered as part of a company’s taxable income. This is because the credit is calculated based on ‘qualified wages,’ which would typically be a deductible business expense. When a company receives an ERC, the amount of that credit effectively reduces the wage expense deduction, thereby increasing taxable income.
For cannabis businesses, this shift in taxable income can have significant implications. The industry is already heavily taxed due to the restrictions of Section 280E of the tax code, which disallows deductions and credits for businesses trafficking controlled substances, including cannabis. While the IRS has allowed these businesses to claim the ERC, the resultant increase in taxable income could inadvertently lead to a higher tax liability.
This brings us to the necessity of potentially amending prior tax returns. If a cannabis business claimed the ERC in a previous tax year but didn’t account for it as taxable income, they might need to amend that year’s return to comply with IRS guidelines.
While the ERC provides much-needed financial relief, it also brings with it complex tax implications. Cannabis businesses must be proactive in understanding and navigating these complexities, ensuring they comply with tax laws while maximizing their financial benefits.
As we navigate the ever-changing tax landscape in the cannabis industry, having an experienced partner on your side is crucial. Bridge West is well-versed in the nuances of the cannabis industry, including the complexities of the ERC refunds and other tax obligations.
Don’t face these challenges alone. Whether your prior tax returns need to be amended or if you need help understanding your tax obligations, Bridge West’s dedicated cannabis team is ready to assist. We’re committed to providing the guidance you need to maximize your financial benefits while ensuring complete compliance with tax laws. Please contact Calvin Shannon with any questions or to schedule a consultation.