Coronavirus Federal Stimulus Bills: Overview and FAQ for Cannabis, Hemp and Ancillary Businesses
Aug 3, 2020
The Federal Government adopted three landmark pieces of legislation in response to the coronavirus pandemic (the Federal Stimulus) that provide relief for businesses and individuals, as well as critical protections for workers and assistance to states.
This overview and FAQ provides specific guidance to marijuana, hemp and ancillary businesses regarding their ability to access federal assistance and their duties and obligations as employers under the Federal Stimulus. Qualified hemp farmers and hemp businesses should be entitled to the same relief as businesses in other industries. Unfortunately, cannabis businesses and businesses ancillary to cannabis are likely ineligible to participate in federal assistance programs due to marijuana’s Schedule I status under the Controlled Substances Act. For example, ancillary businesses, which are referred to by the Small Business Administration (SBA) as “indirect businesses,” that derive any revenue from sales or services to the cannabis industry are excluded from eligibility. Examples of “indirect businesses” are described below in the FAQ: Federal Stimulus & Cannabis Businesses.
Please note that these new federal programs also have implications at the state level, and there may be state and local programs for which your business is eligible. Vicente Sederberg LLP is continuing to analyze these new laws and potential relief for cannabis businesses. Please contact us with specific questions so we can provide more specific information based on individual facts and circumstances.
CONTENTS: Federal Stimulus Overview | FAQ: Federal Stimulus & Cannabis Businesses | FAQ: Paycheck Protection Program | FAQ: Expanded Economic Injury Disaster Loan Program | FAQ: Main Street Lending Program | FAQ: Agricultural & Food Programs | FAQ: Employer Obligations, Tax Credits & Unemployment Benefits
Federal Stimulus Overview
H.R. 6074 – Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (P.L. 116-123) (CPRSA)
Includes provisions relative to the Economic Injury Disaster Loan Program (EIDLP), available through the Small Business Administration (SBA). The EIDLP provides eligible small businesses with working capital loans of up to $2 million in the event of substantial economic injury due to a declared disaster.
CPRSA formally declared the coronavirus pandemic a qualifying disaster for which EIDLP loans may be provided and allocated $20 million to the SBA to support its administration of EIDLP in the wake of the coronavirus emergency.
H.R. 6201 – Families First Coronavirus Response Act (P.L. 116-127) (Families First Act)
- Employers with fewer than 500 employees are required to provide two weeks of paid sick leave to employees who are unable to work due to: quarantine or isolation; coronavirus symptoms; or need to care for someone who is in quarantine or isolation and/or individuals who have children in schools that have closed. Employers will receive tax credits to offset the costs of providing paid leave.
- Small employers with fewer than 50 employees are exempt from certain paid sick leave and expanded family and medical leave requirements related to school or place of care closures or childcare provider unavailability for COVID-19 related reasons if providing an employee with such leave would jeopardize the viability of the business as a going concern.
H.R. 748 – Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
Comprehensive $2 trillion stimulus package aimed to course correct the economic downturn caused by the coronavirus, including $350 billion in support for small businesses.
Includes the Paycheck Protection Program, which amends Section 7(a) of the Small Business Act and expands the Economic Injury Disaster Loan Program (EIDLP).1
Provides $10 billion through an Emergency Grant Program, which will allow small businesses, nonprofits and agricultural cooperatives to request an emergency advance loan of up to $10,000 against an EIDL, with no requirement to repay that advance if the EIDL application is denied.2
Provides $9.5 billion to the Department of Agriculture to provide financial support to farmers and ranchers, $14 billion to the Commodity Credit Corporation to support programs to assist agricultural producers, $20.5 million of lending for the United States Department of Agriculture (USDA) Rural Development Business and Industry Loan Guarantee Program, and temporary extensions on repayment of commodity marketing assistance loans.
FAQ: Federal Stimulus & Cannabis Businesses
Are marijuana businesses eligible for SBA loans and other federal programs?
Because the cultivation and sale of marijuana is illegal under federal law, marijuana businesses and certain ancillary businesses are not eligible to participate in many of these programs. In a March 22, 2020, Twitter post in response to a Washington-based cannabis business owner, SBA confirmed that cannabis businesses are not able to access the SBA funded programs including the EIDL Program, even though cannabis businesses are as equally harmed by the coronavirus pandemic as other law-abiding, tax-paying small business operators.
While SBA has not formally addressed the eligibility of marijuana businesses for the broader Paycheck Protection Program, it appears prior SBA regulation and policy guidance may prohibit access to this program by marijuana businesses and certain other types of businesses.
In concert with passage of the 2018 Farm Bill, the SBA revised its lending policies in a 2019 Policy Notice to allow “hemp-related businesses” access to SBA financial assistance. Notwithstanding this policy change, both “direct” and “indirect” “marijuana-related businesses” remain ineligible to receive SBA loans. The SBA defines these terms as follows:
"Marijuana-Related Business" — Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance. Whether a business is eligible is determined by the nature of the business’s specific operations.
“Direct Marijuana Business” — A business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to recreational use and medical use even if the business is legal under local or state law where the applicant business is or will be located.
“Indirect Marijuana Business” — A business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana. Examples of Indirect Marijuana Businesses include businesses that provide testing services, or sell or install grow lights, hydroponic or other specialized equipment, to one or more Direct Marijuana Businesses; and businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business.
For purposes of illustration, SBA does not consider a plumber who fixes a sink for a Direct Marijuana Business or a tech support company that repairs a laptop for such a business to be aiding in the use, growth, enhancement or other development of marijuana. Indirect Marijuana Businesses also include businesses that sell smoking devices, pipes, bongs, inhalants, or other products if the products are primarily intended or designed for marijuana use or if the business markets the products for such use. A business that grows, produces, processes, distributes or sells products made from hemp (as defined in section 297A of the Agricultural Marketing Act of 1946) is eligible.
Certain businesses that provide ancillary services to the marijuana and/or hemp industry may qualify for relief under the SBA, but eligibility must be assessed on a case by case basis. However, since many banks will not service the cannabis industry, even Indirect Marijuana Businesses that technically qualify for SBA loans could encounter challenges in obtaining SBA funds.
Are there any efforts to secure protections for cannabis businesses?
Several industry trade groups, including the National Cannabis Industry Association, National Cannabis Roundtable, Minority Cannabis Business Association, and the Cannabis Trade Federation, issued a letter to congressional leaders seeking to limit restrictions and allow cannabis businesses to obtain the same relief available to other legitimate industries. The letter called out the inequity to the cannabis industry given its obligations to comply with other Federal Stimulus relating to paid sick leave under the Families First Act. While the desired language did not appear in the bill signed into law on March 27, 2020, numerous U.S. senators expressed public support for making cannabis companies eligible.
On April 8, 2020, industry trade groups sent a separate letter to governors and state treasurers requesting state officials to: (1) encourage congressional delegations to insert language into future COVID-19 legislation that would enable marijuana companies to access SBA relief loans and disaster assistance, and (2) consider creating state-level lending programs for cannabis businesses to help fill the gap created by cannabis business ineligibility for the SBA’s Paycheck Protection Program and Economic Injury Disaster loans.
In addition, there is currently a bill pending in the U.S. House, H.R. 3540, the Ensuring Safe Capital Access for all Small Business Act of 2019, which seeks to remove cannabis from the schedule of controlled substances and prohibit the SBA from declining to provide certain small business loans to an eligible entity solely because it is a “cannabis-related legitimate business”3 or “service provider.”4
Further, House Majority Leader Steny Hoyer recently indicated that he expects Congress to enact at least two more rounds of coronavirus legislative stimulus, indicating that additional financial relief may be available to the small business sector in the future. In the interim, cannabis advocates will continue to promote the specific inclusion of the cannabis industry in economic relief legislation at the federal and state level. Vicente Sederberg and VS Strategies are working in coordination with industry stakeholders to include protections for the cannabis industry at both the federal and state level.
Yes, the SBA clarified that businesses that produce or sell hemp and hemp-derived products that are legal under the 297A of the Agricultural Marketing Act of 1946 (the 2018 Farm Bill) may be eligible for SBA loans.
FAQ: Paycheck Protection Program
August 4, 2020 Update: SBA’s Paycheck Protection Program has resumed accepting applications. If you are considering submitting an application, please contact your Vicente Sederberg attorney so we can help you assess your eligibility, connect with a lender, and provide more specific information based on individual facts and circumstances.
Who qualifies for loans?
Under the CARES Act amendments to the Small Business Act, businesses with fewer than 500 employees or that meet the SBA employee-based size standards if more than 500 employees, including non-profit organizations, sole proprietorships, and veterans’ organizations, are eligible to apply for Paycheck Protection Loans. Independent contractors and self-employed individuals are also eligible. Businesses are not required to have employees or payroll to be eligible for the Paycheck Protection loan.
What do loans cover?
The loan program allows an eligible borrower to obtain a loan to cover payroll costs, costs related to the continuation of group health care benefits, employee salaries, mortgage interest, rent payments under lease agreements in force before February 15, 2020, utilities for which service began before February 15, 2020 (including electricity, gas, water, transportation, telephone, and internet), and interest on other debt incurred before February 15, 2020. The borrower must provide certification that the proceeds of the loan will be used for the foregoing purposes. The covered period for loans is between February 15, 2020, and June 30, 2020 (Covered Period). Loans cannot be used to cover individual employee cash compensation in excess of an annual salary of $100,000 per year, compensation of an employee whose residence is outside of the United States, or sick and family leave wages covered under the Families First Act.
Who provides loans?
Paycheck Protection loans are provided through third party lenders under the 7(a) loan program, as opposed to directly from the SBA. The Treasury Secretary stated that additional lenders will be approved to provide these loans.
Is there a limit on loan amounts?
The loan amount is limited to the lesser of $10 million; or 2.5 times the average amount of “payroll costs” in the one-year period before the loan is made or for the amount paid under the Covered Period if the business did not exist in 2019. Payroll costs are defined as “the sum of all payments for compensation, including salary, wages, cash tips, paid time off, severance, healthcare benefits, state or local taxes.”
See SBA’s guidance on How to Calculate PPP Loan Amounts, effective June 26, 2020. An applicant will be required to provide the following documentation for expenses with their application:
- Payroll costs, including benefits;
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020 (electricity, gas, water, transportation, telephone, or internet).
Are borrowers required to provide collateral?
Neither collateral nor personal guarantees are required.
Is loan forgiveness available?
Provided the loan proceeds are used for allowable expenses over the 8-week period after the loan is made and employee and compensation levels are maintained, borrowers will have their loans forgiven. It is anticipated that no more than 40% of the forgiven amount may be for non-payroll costs. Any principal balance that does not qualify for forgiveness must be repaid over a five-year period at the fixed interest rate of 1%. All payments are deferred for six months.
In order to seek forgiveness, a borrower must submit an application that includes documentation verifying the number of employees and pay rates and canceled checks showing mortgage, rent, or utility payments. The amount of debt forgiveness may be reduced if the employer reduces its workforce during the Covered Period when compared to other periods in 2018 or 2019, or reduces the salary or wages of an employee who had earned less than $100,000 in annualized salary by more than 25 percent during the Covered Period. This reduction may be avoided if the employer rehires or increases the employee’s pay within an allotted time period.
How do you apply for a Paycheck Protection Loan?
Borrowers can apply through their bank or through certain national and regional bank lenders, as well as non-bank SBA lenders. The Paycheck Protection Program borrower application form can be found on the U.S. Department of Treasury website.
Are there any risks in applying for Paycheck Protection Program loans as an ancillary business?
Ancillary businesses should consult with an attorney to assess eligibility prior to submitting a Paycheck Protection Program application. Ancillary business owners should also be aware that the application form itself requires borrowers to certify that they are eligible to receive SBA funding, and confirm that they are not engaged in any activity that is illegal under federal state or local law. Penalties related to knowing false statements on the application include significant fines and/or jail time.
Where can I find information about the Paycheck Protection Program?
Through the Department of Treasury website, applicants can find a detailed information sheet for borrowers. SBA’s updated FAQ contains guidance based on SBA’s interpretation of the Cares Act and of the Paycheck Protection Program Interim Final Rules. According to the FAQ, the U.S. Government will not challenge lender PPP actions that conform to this guidance.
FAQ: Expanded Economic Injury Disaster Loan Program
Who qualifies for loans?
Small businesses with less than 500 employees that are engaged in legal activity and have experienced economic harm as a result of COVID-19 that are not otherwise excluded. As stated above, direct and indirect marijuana businesses are not eligible. The CARES Act expands the SBA’s existing EIDLP for a covered period of January 31, 2020, through December 2020 (EIDL Covered Period). During this EIDL Covered Period, the SBA can approve and offer loans based solely on the borrower’s credit score, or other “alternative appropriate methods” relative to an applicant’s ability to repay.
What do loans cover?
These loans can be used for fixed debts, payroll, accounts payable and other bills that cannot be paid due to the impact of coronavirus. Loans cannot be used for refinancing debts incurred prior to a disaster event, payments on other loans owned by another federal agency or SBA, tax penalties, or disbursements to owners or partners except as related to their performance of services for the business.
Who provides loans?
Loans are issued directly by the SBA. The SBA’s authority to carry out this expanded program will end on December 31, 2020.
Is there a limit on loan amounts?
Borrowers can receive up to $2 million.
Are borrowers required to provide collateral?
Collateral is required for all loans over $25,000 and personal guarantees are required for loans over $200,000.
Is loan forgiveness available?
Up to $10,000 will be available in the form of an Emergency Grant that does not require repayment if used to cover costs related to: paid sick leave for employees, maintaining payroll to retain employees, meeting increased costs as a result of interrupted supply chains, rent or mortgage payments, or repay obligations that cannot be met due to revenue losses. Applicants are entitled to receive $10,000 within three days of applying for an EIDL and will not be required to repay the advance payment even if they are subsequently denied a loan.
How do you apply for an EIDLP?
Borrowers must apply through the SBA. Additional information available here.
Can businesses receive Paycheck Protection Loans and EIDLP Loans to cover coronavirus related expenses?
Eligible businesses may be able to borrow under both programs provided loans are not for the same expenses.
Updated June 9, 2020
The Main Street Lending Program was created to facilitate lending to small and medium-sized businesses that were “in sound financial condition” before the onset of COVID-19 so that they can maintain their operations and payroll until conditions stabilize. Once operational, the Main Street Program will provide up to $600 billion in liquidity to eligible lenders that make direct loans to eligible businesses. Eligible lenders are U.S. federally-insured depository institutions, including banks, savings associations, and credit unions, as well as any U.S. branch of a foreign bank. Currently, nonbank financial institutions are not considered eligible lenders. According to the Federal Reserve FAQ, it is “considering options to expand the list of eligible lenders in the future.”
Who is eligible?
Cannabis businesses remain ineligible for federal assistance programs. Hemp businesses are eligible provided they meet the program’s other eligibility requirements, which include:
- The business was established before March 13, 2020
- The business is not a non-profit, or otherwise an “ineligible business” under SBA’s loan programs
- There are no more than 15,000 employees or the business had 2019 annual revenues of no more than $5 billion
- Must be a U.S. business (significant operations and the majority of employees in the U.S., can be 49% foreign-owned and does not appear to need to be U.S.-domiciled)
- Borrowers that receive a PPP loan are eligible
- View the full list of borrower criteria
Is there a limit on loan amounts?
The program will provide loans from $250,000 to $25 million and borrowers can prepay without penalty.
What are the terms?
The Main Street Lending Program will offer three different secured and unsecured loan options based on EBITDA, security, and seniority of the loan. Loans will have a five-year maturity and will be set at an adjustable rate of LIBOR + 3%. Principal and interest payments are deferred for two years.
Is loan forgiveness available?
No, the Main Street loans are not forgivable.
How do you apply for a Main Street Lending Program loan?
The Federal Reserve has not set a launch date for the program. Borrowers should contact their relationship bank or other eligible lenders for more information on whether the lender plans to participate in the program. Applications have not been posted yet and the corresponding loan documentation will be unique to each eligible lender. Information about the Main Street Lending Program, including eligibility requirements, program terms, and Frequently Asked Questions are available here.
FAQ: Agricultural & Food Programs
What programs are available for food and agricultural businesses-specifically hemp producers?
In addition to the general loans, tax, and other benefits available under the Federal Stimulus (such as EIDL and the Paycheck Protection Program), the CARES Act includes several emergency appropriation provisions to provide relief to the agricultural sector. Note that there are many other federal and state loans, grants, and other benefits available to food, agriculture, and other businesses outside of those included in the Federal Stimulus. These programs may now have additional available funds from the Federal Stimulus. Note that many state grant programs have upcoming deadlines and we recommend promptly consulting with counsel regarding opportunities in your states of operation. The CARES provisions5 include:
$9.5 Billion to the Department of Agriculture for Agricultural Producers: $9.5 billion to the USDA to provide financial support to farmers and ranchers impacted by coronavirus. The funding is allocated for specialty crops (note that hemp is not formally considered by USDA to be a specialty crop), producers who supply local food systems and farmers’ markets, restaurants and schools, livestock producers (i.e., cattlemen and women, and dairy farmers).
$14 Billion to Commodity Credit Corporation (“CCC”): $14 billion for the fiscal year 2020 to replenish the CCC (a funding mechanism for agricultural programs) which is used to stabilize, support and protect farm income and prices through initiatives like the Market Facilitation Program. This replenishment will allow USDA to develop new support programs to assist agricultural producers and potentially help agribusinesses such as ethanol plants.
$20.5 Million of Lending for USDA’s Rural Development Business and Industry Loan Guarantee Program: The Act includes $20.5 million to support $1 billion in lending for USDA’s Rural Development Business and Industry Loan Guarantee Program. This program targets rural businesses and provides loans ranging from $200,000 to $5 million, with an average size of approximately $3 million. Eligible businesses include businesses with facilities located in rural areas that save or create jobs. Most types and sizes of businesses are eligible, including those engaged in manufacturing, wholesale, retail, and service industries, with certain exceptions. Eligible entities include partnerships, individuals, cooperatives, for-profit and nonprofit corporations, including publicly-traded companies, tribal groups, or public bodies.
A temporary three-month extension on repayment of commodity marketing assistance loans, from nine months up to a year: Until September 30, 2020, the Secretary may extend the term of a marketing assistance loan authorized by Section 1201 of the Agricultural Act of 2014 (7 U.S.C. 9033) for any loan commodity to 12 months.
$100 million in grants to improve rural broadband.
How can Rural Development Business and Industry Loans be used?
Loan funds may be used for any essential business purpose, including but not limited to the following: (i) Business acquisitions, construction, conversion, expansion, repair, modernization and development; (ii) Purchase of equipment, machinery, and supplies; (iii) Startup costs and working capital; Projects supported by New Markets Tax Credits; (iv) Debt refinancing under certain conditions. Funds can be used to refinance loans, provided the refinancing improves cash flow while creating or saving jobs6. More information on the USDA’s Rural Development Guaranteed Loan Program can be found here and here.
Where can farmers get more information about potential federal loans?
USDA’s Farm Service Agency (FSA) is the primary lending arm of the USDA, and its county offices are open by phone appointment FSA staff are available to continue helping agricultural producers with program signups, loan servicing and other important actions. Additionally, FSA is relaxing the loan-making process and adding flexibilities for servicing direct and guaranteed loans to provide credit to producers in need. Some services are also available online to customers via the farmers.gov portal where producers can view USDA farm loan information and payments and view and track certain USDA program applications and payments.
- Eligibility under the 2014 Farm Bill: The Farm Services Agency (FSA) has stated that certain commercial registrants in states still operating under the 2014 Farm Bill may not be eligible for some FSA loan programs. Please contact Vicente Sederberg for assistance regarding eligibility.
What is the USDA Coronavirus Food Assistance Program?
On April 17, 2020, the U.S. Secretary of Agriculture announced the Coronavirus Food Assistance Program (CFAP), a $19 billion relief package to provide support to farmers and ranchers, maintain the integrity of the food supply chain, and ensure every American continues to receive and have access to the food they need. According to a statement released by U.S. Senator John Hoevan of North Dakota, chairman of the Senate Agriculture Appropriations Committee, $16 billion in direct payments will include: $9.6 billion for the livestock industry, $3.9 to row crop producers, $2.1 billion to specialty crop producers, and $500 million for other crops. The $16 billion in direct payments for farmers and ranchers will be funded using the $9.5 billion secured in the CARES Act for the Department of Agriculture and $6.5 billion in Commodity Credit Corporation (CCC) funding.
In an April 17, 2020 media call, U.S. Secretary of Agriculture Sonny Perdue said the $500 million for “other crops” includes hemp. Perdue stated, “Hemp growers, if they demonstrate a loss, they will be considered like other crops.” The link to the audio from Secretary Perdue’s media call can be found here.
The program consists of two major components: (1) $16 billion in direct support to farmers and ranchers and (2) $3 billion in purchases of agriculture products.
Direct support to farmers and ranchers. The $16 billion in direct payments to farmers and ranchers will be based on actual losses for agricultural producers where prices and market supply chains have been impacted and will assist producers with additional adjustments and marketing costs resulting from lost demand and short-term oversupply for the 2020 marketing year caused by COVID-19.
According to Senator Hoevan’s news release, producers will receive a single payment determined using two calculations:
- Price losses that occurred January 1-April 15, 2020. Producers will be compensated for 85% of price loss during that period.
- The second part of the payment will be expected losses from April 15 through the next two quarters and will cover 30% of expected losses.
The payment limit is $125,000 per commodity with an overall limit of $250,000 per individual or entity. Qualified commodities must have experienced a 5% price decrease between January and April.
The USDA is accepting applications through the Farm Service Agency through August 28, 2020. Producers have two options for submitting their CFAP applications. These include:
- Downloading the AD-3114 application form from farmers.gov/cfap and manually completing the form to submit to the local USDA Service Center by mail, electronically or by hand delivery to an office drop box; or
- Completing the application form using the CFAP Application Generator and Payment Calculator.
To find the latest information on CFAP, visit farmers.gov/cfap.
USDA Purchase and Distribution. USDA will partner with regional and local distributors to purchase $3 billion in agricultural products, including produce, dairy and meat that will be provided to food banks and other non-profits serving people in need.
USDA also released a comprehensive COVID-19 Federal Rural Resource Guide that provides details on all federal resources that can help rural residents, businesses, and communities.
FAQ: Employer Obligations, Tax Credits & Unemployment Benefits
What loans are available to cover employment-related costs?
Under the CARES Act, certain employers can apply for EIDLP and Paycheck Protection Loans-discussed above.
Is there any additional financial relief available to employers outside of SBA Loans?
Yes, including: employee retention credits; delays in payment of payroll taxes; and limitations on payments for paid leave and paid sick leave.
Employee Retention Credit (Section 2301): Subject to certain restrictions, the federal government will provide a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. Eligible employers include those (i) whose operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (ii) whose gross receipts declined by more than 50 percent when compared to the same quarter the prior year.
Delay of Payment of Payroll Taxes (Section 2302): Employers and self-employed individuals may defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government concerning their employees (generally a 6.2-percent Social Security tax on employee wages), with the deferred tax be paid over the following two years, with half due by the end of 2021 and the other half due by the end of 2022.
Limitations on Paid Leave and Paid Sick Leave (Sections 3601 – 3602): Employers will not be required to pay more than $200 per day and $10,000 in the aggregate in paid leave for each employee; and for each employee, employers will not be required to pay more than $511 per day and $5,110 in the aggregate for sick leave or more than $200 per day and $2,000 in the aggregate to care for a quarantined individual or child.
Are Marijuana Businesses Eligible for Tax Credits?
Although eligibility for specific tax credits may vary depending on businesses operations, certain marijuana businesses, particularly retail businesses, may not be eligible for tax credits as a result of 26 USC § 280E, which states:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
However, if the credits are deemed to not have been paid or incurred in trafficking, these marijuana businesses may be qualified. We recommend consulting with your CPA or tax counsel to determine whether your business qualifies for the credits.
What options are available to employers that need to reduce their workforce?
Three primary options available to employers include: layoffs; short-term unpaid leave due to lack of work (also known as “furlough”); and reducing employees’ hours and/or pay7. Furlough employees may be able to maintain certain benefits such as health insurance; however, receipt of paid sick leave or other paid leave benefits, may render an employee ineligible for the expanded unemployment benefits included in the CARES Act. Businesses should consult with counsel to understand the benefits and consequences of each option.
Is financial relief available to individuals subject to layoffs, furloughs, or reductions in hours and pay, including employees of marijuana businesses?
If an employee is laid off, furloughed, or experiences a reduction in hours and pay as a result of COVID-19, there are several benefits available under the CARES Act. Some of the more significant financial benefits available include expanded unemployment benefits; short-time compensation benefits; one-time recovery rebate payments; special rules for retirement funds; student loan suspensions; and eviction moratorium. Employees of marijuana businesses in states with regulated marijuana programs are likely to be eligible for the unemployment benefits described below, as the federal government will provide the funds directly to each state for the state to then distribute to individuals through the state’s unemployment program.
Expanded Unemployment Benefits (Sections 2102 – 2107): The CARES Act creates a temporary Pandemic Unemployment Assistance program through December 31, 2020, to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency. Under this expanded unemployment program, eligible individuals can receive an extra $600 per week up to 4 months on top of state benefits (state unemployment benefits vary).
The federal government is fully funding the first week of compensable regular unemployment for states that choose to pay recipients as soon as they become unemployed rather than waiting a week.
All eligible individuals will also receive an additional 13 weeks of benefits after their state unemployment benefits are no longer available (up to a maximum of 39 months total).
Those already receiving unemployment benefits will also be eligible for the extra $600 per week for 4 months and a 13-week extension.
Individuals who can work from home or receiving paid sick or family leave would not be covered.
Short-time Compensation Payments (Section 2108): If an employer chooses to reduce employees’ hours instead of laying off workers, and their state has a short-time compensation program, then employees may be eligible to receive a pro-rated unemployment benefit that will be paid for entirely by the federal government through the end of 2020.
One-time Recovery Rebate (Section 2201): U.S. residents with adjusted gross income up to $75,000, who are not a dependent of another taxpayer and have a work-eligible social security number, are eligible for a one-time $1,200 rebate ($2,400 for married couples making $150,000 or less). For the vast majority of Americans, no action is required to receive a rebate check as IRS will use a taxpayer’s 2019 tax return, if filed (or their 2018 return). Also, individuals will be eligible for an additional $500 per child. This is available even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits. The rebate amount will be reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold, and the amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.
Special Rules for Retirement Funds (Sections 2202 – 2203): The 10 percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020, is waived and the income attributable to such distributions will be taxed over three years. Similarly, the required minimum distribution rules for certain contribution plans and IRAs are waived for the duration of 2020.
Federal Student Loan Suspension (Section 3513): The Department of Education is required to defer student loan payments, principal, and interest for 6 months, through September 30, 2020, without penalty to the borrower for all federally owned loans-which is expected to provide relief for over 95 percent of student loan borrowers.
Foreclosure and Eviction Moratoriums (Sections 4022 – 4024): For at least 60 days from March 18, 2020, servicers of federally-backed mortgage loans are prohibited (except in the case of a vacant or abandoned property) to initiate any foreclosure process or foreclosure-related action. A borrower with a federally-backed mortgage loan may request forbearance, regardless of delinquency status and without penalties, fees, or interest, by submitting a request to its servicer and affirming financial hardship due to COVID-19, at which point, a forbearance must be granted for up to 180 days and extended for an additional period of up to 180 days at the borrower’s request, though the initial or extended forbearance may be shortened. And, for 120 days following enactment of the CARES Act, landlords cannot initiate legal action to recover possession of rental unit charging fees, penalties, or other charges to the tenant related to such nonpayment of rent where the landlord’s mortgage on that property is insured, guaranteed, supplemented, protected, or assisted in any way by HUD, Fannie Mae, Freddie Mac, the rural housing voucher program, or the Violence Against Women Act of 1994.
To learn more about the eligibility of your business for loans, tax credits, or other relief under COVID-19 related federal or state laws or for support in applying for a loan, please contact your Vicente Sederberg attorney. Please note the information provided is limited to the programs under the Federal Stimulus and is not a comprehensive list of all state, federal, and local programs. There are many other federal and state loans, grants, and other benefits that may be available to your business.
Vicente Sederberg is actively monitoring federal, state, and local action and will continue to provide updates through our COVID-19 Resource Center.
1 Title I, Section 1102 of the CARES Act.
2 Title I, Section 1110 of the CARES Act.
3 The term “cannabis-related legitimate business” is defined as a “manufacturer, producer, or any person or company that is a small business concern and that—(I) engages in any activity described in subclause (II) pursuant to a law established by a State or a political subdivision of a State, as determined by such State or political subdivision; an “(II) participates in any business or organized activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.
4 The term “service provider” is defined as follows: “(I) means a business, organization, or other person that— (aa) sells goods or services to a cannabis-related legitimate business; or (bb) provides any business services, including the sale or lease of real or any other property, legal or other licensed services, or any other ancillary service, relating to cannabis; and (II) does not include a business, organization, or other person that participates in any business or organized activity that involves handling cannabis or cannabis products, including cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.
5 These provisions are found in Division B of the Act, entitled “Emergency Appropriations for Coronavirus Health Response and Agency Operations.
6 If a lender wishes to refinance a loan already in its portfolio, the loan being refinanced must be closed and current for at least the past 12 months and may not exceed 50 percent of the overall loan unless the loan is federally guaranteed.
7 Employees subject to reduced hours and/or compensation may be eligible for short-time compensation benefits.