April 1, 2020
COVID-19 and Federal Assistance for the Cannabis and Hemp Industry
Posted by Mike Goral
These past few weeks have been challenging for all of us, including cannabis and hemp companies, which are no strangers to the ups and downs of market conditions. As COVID-19 has become more widespread, many states have declared these businesses “essential services” and allowed them to operate under some restrictive guidelines, including social distancing and curbside pickup.
Because of the pandemic, some of our cannabis and hemp clients are seeing sales increases of 25% to over 200%. Nevertheless, this has caused a strain on supply chains, and shelter-in-place orders have made it difficult for many workers to perform their jobs.
To help companies during these turbulent times, the federal government implemented three separate stimulus packages in March 2020. Some may assist cannabis companies, and most are available to hemp companies. Here is a summary.
Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074)
The president signed this bill on March 6, 2020, and instructed the U.S. Small Business Administration (SBA) to provide capital and liquidity to firms affected by the coronavirus. The legislation provides $50 billion of low-interest loans to qualifying companies. Unfortunately, the SBA was explicit and specifically excluded marijuana businesses even if the business is legal under state law.
Hemp companies, however, are fully legal under the 2018 Farm Bill. Therefore, the limitations placed on cannabis and marijuana businesses should not apply to hemp business that are operating in compliance with federal and state rules and regulations.
Families First Coronavirus Response Act (H.R. 6201)
This sweeping legislation temporarily extends and enhances policies relating to family and medical leave for employers with fewer than 500 employees. It took effect on April 1, 2020, and has three related parts:
1. Emergency Family and Medical Leave Expansion Act
This section outlines requirements for providing ongoing paid family leave time for up to 12 weeks. Therefore, if you have employees who cannot go to work because they have the coronavirus themselves, are staying at home with children who are no longer in school, are taking care of a family member with the coronavirus, or otherwise must comply with the shelter-in-place order, you can still pay them up to 12 weeks and get reimbursed under this Act. Although the first 2 weeks are unpaid, the employee may get paid sick leave either under this law or under existing sick time policies. For the next 10 weeks, employees must receive at least two-thirds of their regular pay, up to $200 per day and a total of $10,000.
2. Emergency Paid Sick Leave Act
Similar to the Emergency Family and Medical Leave Expansion Act above, the guidance applies to employers with fewer than 500 employees and requires them to provide sick leave, which can be reimbursed. However, two caps are provided:
- The cap is $511 per day and $5,110 total if an employee is ill or subject to quarantine, either mandated or recommended.
- The cap is $200 per day and $2,000 total if the employee is caring for others, including family members affected by the illness or a school-aged child whose school or childcare center has been closed.
3. Payroll Tax Credits
There are payroll tax credits available to employers who provide COVID-19 related leave payments made to employees.
The application of this section to cannabis companies is a little complicated, since it is connected to the state-administered unemployment insurance programs. It’s important to note that these funds are transferred from the federal government to the state governments. Therefore, individual states have the authority to decide which industries are legally eligible to receive benefits. It is assumed that state-approved, licensed cannabis companies would qualify for these benefits.
The tricky part for cannabis companies is that the IRS will reimburse employers for 100% of the cost of paid sick leave, either through payroll tax credits and/or direct payment refunds. A tax credit would run afoul of IRC 280E and could be denied by the IRS. However, a direct reimbursement would not have the same IRC 280E limitation. More detail about these credits is still pending per the IRS’s approval. We’ll have more information once the official governance is available.
Hemp companies should be able to fully participate in all aspects of the Families First Coronavirus Response Act.
Coronavirus Aid, Relief, and Economic Security (CARES) Act
Under the CARES Act, small businesses can receive small business interruption loans to cover payroll expenses, health care benefits, employee salaries, rent, utilities and interest on mortgage debt. There are two programs:
1. Paycheck Protection Program (PPP)
PPP loans are made by traditional commercial lenders (banks, credit unions, etc.) with delegated authority under the SBA 7(a) guarantee program, and lenders are responsible for qualifying borrowers. Loans can be made up to $10 million, with 4% interest and up to 10-year terms.
Traditional lenders have typically shunned cannabis companies, so it is not likely many will receive funding from this part of the Act. Hemp companies have a better chance, but the loan approval process may eliminate many of these companies as well.
2. SBA Economic Disaster Loans
Economic disaster loans are made directly by the SBA. The loans can be made up to $2 million and require collateral plus personal guarantees. The interest rates are 2.75% for nonprofits and 3.75% for small businesses.
Since the SBA has explicitly stated that marijuana and cannabis companies are not eligible for SBA loans, it would appear that this would not be an option for these companies. However, hemp companies could qualify if they meet the other qualifications.
For the latest regulatory updates and more information on keeping your business running through disruption, visit the Armanino COVID-19 Resource Center.
Mike leads Armanino’s Cannabis Tax group. A tax professional since 1989, he has significant experience in federal, state and local tax from both an accounting and legal perspective. He spent time with multiple Big 4 firms, including serving in KPMG’s Washington National Tax Office, and has worked with cannabis companies both large and small in California, Nevada, Oregon, Washington and Colorado.
He advises cannabis clients on a broad range of issues that affect the space, including mergers and acquisitions, loan structuring, and funding mechanisms from venture capital, private equity and investment banking. Mike provides guidance on cannabis technology, manufacturing, transportation and retail issues, and literally wrote the book on Cannabis Taxation for Thomson Reuters.
Mike is the contributing editor of Cannabis Taxation a 250-page treatise for Thompson Reuters discussing the 33 states that tax cannabis sales. He is a member of the California Society of Certified Public Accountants, the National Cannabis Industry Association and the California Cannabis Association, which nominated him for their CPA of the Year award for 2019. He holds a B.S. in mathematics and psychology from the University of Alabama, a J.D. from Cumberland Law, and a Masters of Tax Law from Emory Law School.