(Editor’s note: This story is part of a recurring series of commentaries from professionals connected to the cannabis industry. Codie Sanchez is managing director at Entourage Effect Capital. For more information on the CARES Act, catch our full webinar interview with Codie Sanchez.)
The federal government has come out with the single most expansive relief package, the Coronavirus Aid, Relief and Economic Security Act, since the New Deal of the 1930s.
While the CARES Act is sweeping in its mandate, there is one sector potentially missed – the cannabis industry.
Get more from Codie Sanchez on the CARES Act: Catch our free, archived webinar. Here’s a preview.
Given the more than $1.6 billion paid out in taxes by our industry in 2019, the tens of thousands we employ and the billions of dollars in sales this industry generates, it would be a glaring oversight.
Our company’s review of the CARES Act is far from comprehensive, but we hope it sheds light in this time of crisis.
It goes without saying that close coordination with your accounting, tax, financial advisers and payroll provider are critical to understanding the applications.
Our overarching thoughts on the CARES Act include:
- Guides: Although it wouldn’t be bad for you to review the entire bill, in true political fashion, the legislation is long on verbiage. Thus, you can also reference the guide.
- U.S. Small Business Administration lenders: If any of the below fit your parameters, it appears to be important to apply early, either through your bank or large SBA lenders (of which there are 14 nonbank institutions, including Fountainhead).
- Business-interruption insurance: For many of you with insurance, the state-mandated closures of cannabis businesses might trigger the “civil authority” coverage (allowing for payment of lost profits, payroll, etc.) that is in many standard property policies. This link offers some insight, and do not automatically accept insurers who suggest coverage is not available for COVID-19.
The most relevant programs outlined below are based off our conversations thus far.
That said, be sure you validate all these understandings with your team, attorney and finance/tax professionals. The bill is complex, and some programs are mutually exclusive.
1. The Employee Retention Credit.
The ERC provides eligible employers with a refundable payroll tax credit for 50% of the wages – and health insurance – paid by employers during the crisis. It applies to wages paid between March 13, 2020, and the end of 2020.
Under the ERC, there is no application. You simply reduce the amount of your payroll tax deposits. It is a 100% credit with no interest.
The tax credit is provided for the first $10,000 of compensation (including health benefits) paid to an eligible employee and is based on qualified wages paid.
For employers with more than 100 full-time employees, “qualified wages” may include the employer’s contribution to health-insurance costs but exclude any amounts already received as tax credit.
Further, “qualified wages” are wages paid to employees who aren’t providing services because of the reasons specified above.
The credit is claimed on a quarterly basis and is applicable to wages paid between March 13, 2020, and Dec. 31, 2020.
2. Employer payroll tax delay.
Employers can defer the 6.2% Federal Insurance Contributions Act payroll tax due for the rest of year.
However, employers who received 7(a) loans that are ultimately forgiven under the CARES Act are not eligible for this payroll tax deferral, based on our understanding of the law. Again, consult your payroll processor.
3. Paid sick leave/payroll tax credits.
Employers with fewer than 500 employees are required to provide up to 80 hours of emergency paid sick leave for employee absences tied to the coronavirus.
Employers will be eligible for certain payroll tax credits on such amounts paid to offset the cost, up to a maximum amount.
Employers with fewer than 50 employees might be eligible for a hardship exemption. This law is effective from April 2, 2020, through Dec. 31, 2020.
4. Loss credits.
- Net operating losses for 2018, 2019 and 2020 may be carried back five years to obtain a refund.
- Net operating losses before Jan. 1, 2021, might fully offset income. The amount previously was 80%.
- Certain large companies that were subject to a limit on their business interest expense of 30% of adjusted taxable income can now claim 50% of adjusted taxable income for 2019 and 2020.
1. State-specific programs
Be sure to check your state as many have programs in place, such as Florida’s bridge loan program.
2. SBA Economic Injury Disaster Loans (EIDL)
These are direct loans made by the Small Business Administration. They are worth up to $2 million and are guaranteed.
The application process takes up to four weeks in the best cases. EIDL allows the SBA to offer and approve these loans based solely on a borrower’s credit score.
3. Relief loans or paycheck protection loans 7(a)
These loans are administered through private lending institutions and are different from SBA loans.
Personal recourse, collateral and maximum income are not required, and personal-resources restrictions are not applicable nor are affiliation rules.
Private equity- and venture-backed companies are covered if their affiliate employees have no more than 500 employees and were in business as of Feb 15, 2020.
You can receive 2.5 times the average monthly “payroll” over the past 12 months with a maximum of $10 million through Dec. 31, 2020.
All you need to do is verify “payroll,” which includes salaries, consulting fees (1099), wages and benefits. For sole proprietors, you can include up to $100,000 of payroll for a sole proprietor.
A significant portion of these loans will be forgiven, based on our understanding. How you use the proceeds will determine forgiveness. For instance:
- The more you apply to payroll, the more you can get forgiven.
- You can fire/furlough, and the more you rehire, more of the loan will be forgiven. If your loan isn’t forgiven fully, it converts to a 10-year fully amortizing loan at 4% with a six-month deferment.
Remember to act quickly and ask for the allowances you and your employees deserve.
Good luck in these chaotic times.
Codie Sanchez can be reached through her LinkedIn page.
The previous installment of this series is available here.
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For more of Marijuana Business Daily’s ongoing coverage of the coronavirus pandemic and its effects on the cannabis industry, click here.