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October 18, 2022

Five Things Cannabis Operators Need to Know about the Employee Retention Tax Credit

by Lucia Valenzuela, Tax Credits and Incentives Practice Leader

Executive Summary

  • Cannabis operators qualify for the Employee Retention Tax Credit (ERTC) because it is a payroll tax credit and not related to federal income tax.
  • Cannabis operators can get up to $26,000/employee in payroll tax credits.
  • The deadline to apply for the ERTC ranges from Q1 2023 to Q3 2024.

Cannabis operators and investors are all too familiar with the burden of federal tax laws and the resulting thin profit margins. During the COVID-19 pandemic the federal government introduced several financial relief programs for businesses navigating the economic fallout. Yet again, cannabis businesses were blocked from accessing these programs due to the federal illegality of cannabis.

But all of that has changed with the updated eligibility rules for the Employee Retention Tax Credit (ERTC). This powerful program allows businesses that maintained staff during the pandemic to get up to $26,000 in payroll tax credits. And best of all, cannabis businesses qualify.

In the following we will break down the top details you need to know about how to determine eligibility, how the program works, and how to apply.

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#1 – Why cannabis businesses qualify for the ERTC

The limiting factor in federal taxes for cannabis is the dreaded IRC 280E. Found in the income tax section of our federal tax laws, 280E is what keeps operators from deducting common business expenses. The ERTC is a payroll tax credit so 280E does not apply, opening the door for cannabis operators to benefit from this opportunity.

#2 – How much can cannabis operators get from the ERTC?

ERTC claimants can get up to $26,000 per employee in credits for payroll tax payments made between March 12, 2020 and Sept. 30, 2021. It breaks down like so:

  • 2021: Maximum credit of $21,000 per employee
  • 2020: Maximum credit of $5,000 per employee

#3 – What cannabis businesses are eligible for the ERTC?

All cannabis operators, including cultivators, distributors, manufacturers, retailers, and investors, may qualify if they meet one or more of these criteria:

You suspended business activity, either partially or in full, due to local, state, or federal government lockdown orders.

  • You had a decline in gross receipts of 50% or more during any quarter of 2020 compared
  • to the same quarter of 2019.
  • You had a decline in gross receipts of 20% or more during any quarter of 2021 compared to the same quarter of 2019.

For 2020 credits, companies with fewer than 100 employees may be eligible for the credit (for all employees). For 2021 returns, companies with fewer than 500 employees may be eligible for the credit (for all employees).

A company with over 100 (in 2020) or over 500 (in 2021) are not disqualified but do have different rules for eligibility.

#4 – How does a cannabis business claim the ERTC?

As a payroll tax credit, the ERTC claim is reported on amended Form 941 for the period in question. To determine qualification on Form 941, your cannabis company will need to provide information like:

  • Quarterly revenues
  • Payroll tax returns
  • Employee wages
  • Lines of business

#5 – What is the deadline to apply for the ERTC?

The deadline for claiming the ERTC depends on the return you seek to amend. The statute of limitations for amending Form 941 is three years from the original filing. So, the deadline will range between Q1 2023 and Q3 2024.

Support for claiming the ERTC

Determining eligibility and calculating a legitimate ERTC claim can be complicated. Additionally, the IRS has indicated they will be taking a close look at ERTC claims. That is why we recommend working with a qualified CPA firm that understands both tax credits and incentives, and appropriate accounting for the cannabis industry.

MGO’s dedicated Tax Credits and Incentives team has CPAs focused on accurate, defendable ERTC claims. We provide a Phase 1 Assessment free-of-charge, and if you decide to proceed, we bill on a flat-fee, no-commission, basis to determine eligibility, calculate credits, submit forms, and prepare documentation.

If you’d like a free consultation to help determine if you qualify, please contact us.

__About the author: __

Lucia Valenzuela is a Tax Partner and leader of the Tax Credits and Incentives practice. She is a licensed California attorney focused on helping clients identify and substantiate tax credit claims against the IRS and state taxing authorities. Lucia has extensive experience in various industries, including cannabis, software and technology, manufacturing, cosmetics, agriculture, and life sciences.

tax credits and incentives