Cannabis Companies Should Wait on First Quarter 2020 Payroll Tax Filings
CannaBlog By Jim Marty, CEO and Calvin Shannon, Principal Bridge West CPAs and Advisors to the Cannabis Industry
April 7, 2020
At the end of March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act, (“CARES Act”) and on March 27, 2020, President Trump signed it into law. This two-trillion-dollar bill is the Federal response to the Coronavirus pandemic and contains several provisions to assist small businesses. The primary question: Is there help in the CARES Act for cannabis companies?
There are four provisions in the CARES Act that help small businesses that we will address in this CannaBlog. The first is the funding for the Economic Injury Disaster Loan (“EIDL”) program that allows small businesses to apply for SBA loans. When you submit your application, you will receive a $10,000 grant which is not required to be paid back. Applicants can receive up to $2 million of funding based on the SBA’s assessment of your economic injury. The funds may be used for payroll, fixed debts, accounts payable, and other expenses that can’t be paid because of the disaster’s impact. Terms are up to 30 years at a fixed interest rate of 3.75%. Also, there is no personal guarantee for loans less than $200,000 but do require personal guarantee by owners greater than 20% of the excess of the $200,000. The credit worthiness of the borrower has been waived.
Next is the Paycheck Protection Program (“PPP”), which are programs administered by the Small Business Administration (SBA). In order to qualify, you must not have more than 500 employees, including individuals employed as full-time, part-time, or other. There are certain exceptions for industries under Sector 72 of the NAIC Code. The business must be in operation as of February 15, 2020. The PPP allows employers to receive a loan for two and a half times of their average payroll up to $10 million. If you applied for an EIDL loan and received the $10,000 then the PPP loan would be reduced by $10,000. The loan proceeds may be used for payroll costs, rent, utilities, mortgage interest, and interest on debt incurred before February 15, 2020. The principal amount of the loan maybe forgiven once you certify that the funds were used for qualified costs. No payments for the first six months and then amortized over two years at 1% annual interest rate. There are no personal guarantees or collateral requirements. Just like the EIDL program, there is no credit worthiness of the borrower required.
At the time of this writing, it appears cannabis companies are not eligible to participate in these programs because they are involved in a Federally illegal activity. The SBA has specific rules that prevent illegal businesses from getting loans the SBA administers.
Generally, Section 7(a) of the SBA Act deems several types of businesses ineligible for purposes of loan programs thereunder. A list of businesses that are typically deemed ineligible for Section 7(a) loans can be found in the in Part 120 of Title 13 in the Code of Federal Regulations (C.F.R.), and includes businesses such as casinos, political/lobbying organizations, illegal businesses, and businesses located in a foreign country.
All applicants of the EIDL and PPP must represent the following: The applicant is not engaged in any activity that is illegal under federal, state or local law. Therefore, high THC companies would not be able to apply; however, we believe that hemp and CBD companies that are compliant with the 2018 Farm Bill and state regulations would be able to apply.
There is a third provision to the CARES Act that may be available to state legal medical and adult use marijuana companies as well as hemp and CBD organizations. That is the Social Security tax deferral provision that allows employers to defer the payment of the employer’s portion of the Social Security tax, 6.2% of wages, until December 31, 2020. Then half of the deferred amount is due by December 31, 2021, and the other half is due by December 31, 2022. This program is the equivalent of an interest free loan. However, it should be noted that if the employer’s portion of the Social Security tax is not paid by the due dates, there are significant penalties and interest. Also, the person authorizing the deferral of the payment can be held liable.
The IRS will issue a new form 941 to add lines for employers to claim this tax deferral. Form 941 is a quarterly tax filing for employers to report and pay Federal income taxes, Medicare taxes and Social Security taxes withheld from employees’ paychecks. There is also an employer match of the 6.2% Social Security tax. This is the part that qualifies for the deferral until 2021 and 2022.
Bridge West’s tax experts recommend cannabis companies wait to file their first quarter of 2020 payroll tax returns until the new 941 form is issued. These are due April 30, 2020, so we have a little time.
Lastly, cannabis, hemp and CBD business may be able to take advantage of a provision of the CARES Act that provides a refundable payroll tax credit for 50% of wages paid by employers to employees. To qualify the employer’s business must be fully or partially suspended by government order. Alternatively, employers can qualify if gross receipts are less than 50% of the comparable quarter in 2019.
Stay tuned and don’t hesitate to contact Jim Marty or Calvin Shannon at Bridge West CPAs and Advisors to the Cannabis Industry with any questions and for assistance navigating these unprecedented changes. Jim can be reached at 303-651-0304 and firstname.lastname@example.org and Calvin can be reached at 651-287-6327 and email@example.com.