More Guidance From IRS On PPP Loans: Lenders Should Not File Form 1099-C for Forgiven PPP loans

More Guidance From IRS On PPP Loans: Lenders Should Not File Form 1099-C for Forgiven PPP loans

On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.  One of the most publicized provisions is the access of funds through banks to qualifying businesses and self-employed taxpayers to pay for payroll, insurance premiums and mortgage, rent and utility payments.  This is known as the Paycheck Protection Program (“PPP”).

Under this program administered by the U.S. Treasury and the U.S. Small Business Administration (SBA), small businesses with 500 or fewer employees including not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors are eligible for loans to pay up to eight weeks of payroll costs including benefits as well as other costs.

Eligible loan recipients are eligible for forgiveness of indebtedness for all or a portion of the stated principal amount of a covered PPP loan if certain conditions are satisfied, and the forgiven amount is excluded from the borrower’s gross income.

How To Report Forgiven PPP Loans?

IRC §6050P generally requires a lender that discharges at least $600 of a borrower’s indebtedness to file a Form 1099-C, Cancellation of Debt, with the IRS and to furnish a payee statement to the borrower.  Concerned that the filing of such information returns could result in the issuance of under-reporter notices (IRS Letter CP2000) to eligible recipients, on September 22, 2020, the IRS announced that lenders in the PPP should not file cancellation-of-debt information returns or furnish payee statements under IRC §6050P to report the amount of qualifying forgiveness with respect to covered loans made under PPP.

Recent Guidance Issued By The U.S. Treasury

On April 6, 2020, the U.S. Treasury and the SBA released FAQs on the PPP. The FAQs clarify certain aspects of the program which hopefully will expediate the process of the PPP funds being released to businesses.  The FAQs cover:

  • Using the gross payroll approach for both loan application and forgiveness and that the employer’s share of Federal Insurance Contributions Act taxesshould not be included.
  • The $100,000 salarylimitation does not include health care, retirement benefits, and state and local taxes.
  • Applicants that use Professional Employer Organizations (PEOs) can provide payroll reports since they cannot produce individual entity payroll tax documents.
  • The time period for calculating payroll costs for the maximum loan amount.

What can PPP funds be used to pay?

PPP funds can be used to pay payroll costs including benefits (with salaries being under $100,000 per employee), interest on mortgages, rent payments, and utility bills; however, no more than 40% of the funds can be used for non-payroll costs.

What counts as payroll costs?

  • Salarywages, commissions, or tips (capped at $100,000 on an annualized basisfor each employee);
  • Employeebenefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
  • State and local taxesassessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basisfor each employee.

What counts as non-payroll costs?

  • Intereston 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.

Under what circumstances do I have to repay these PPP funds received?

The loan of the PPP funds will be forgiven if you maintain your pre-existing employees at their pre-existing salary levels.  Also, that you do not pay out more than 40% of the PPP funds for non-payroll costs specifically limited to: interest on mortgages, rent, and utilities.

How large can my loan be?

Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.

How many loans can I take out under PPP?

Only one.

Are there any charges or requirements for collateral or personal guarantees?

No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

What if I do not spend all the funds or make non-qualifying expenditures?

The amount of loan forgiveness will be reduced including if full-time headcount declines or if salaries and wages decrease.  Also, if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 24 weeks after getting the loan.

How can I request loan forgiveness?

You can submit a request to the lender that is servicing the loan by completing the SBA application. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.

What is my interest rate?

1% fixed rate.

When do I need to start paying interest on my loan?

All payments are deferred for 6 months; however, interest will continue to accrue over this period.

When is my loan due?

Loans issued prior to June 5, 2020 have a maturity of 2 years. Loans issued after June 5, 2020 have a maturity of 5 years.

Can I pay my loan earlier?

Yes. There are no prepayment penalties or fees.

What Should You Do?

Now with the 24-week certification period expiring on many PPP Loans, let the attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California assist you achieve full PPP loan forgiveness.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS Takes New Steps For 50,000 Spouses To Get “Catch-up” Economic Impact Payments

IRS Takes New Steps For 50,000 Spouses To Get “Catch-up” Economic Impact Payments

What To Do If Your Economic Impact Payment Is Wrong.

On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.  One of the most publicized provisions is the immediate cash payments by the Federal government to qualifying taxpayers.

Who is eligible for the economic impact payment?

To get cash assistance promptly delivered to individual taxpayers, qualifying taxpayers will receive one-time cash payments of $1,200 for individual taxpayers or if married, $2,400 for married couples.  An additional $500 may be paid for each qualifying child.

These amounts are subject to reduction if the individual’s Adjusted Gross Income (AGI) exceeds $75,000 for an individual taxpayer; $112,500 for head of household; or $150,000 for a married couple.

Nonresident alien individuals and a person who is the dependent of another are ineligible to receive the payment.

For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

So what if your economic impact payment was diverted to pay your spouse’s past-due child support, how do you claim the missing funds?

These catch-up payments are due to be issued in early-to-mid-September 2020. They will be mailed as checks to any eligible spouse who submitted Form 8379, Injured Spouse Allocation, along with their 2019 federal income tax return, or in some cases, their 2018 return. These spouses do not need to take any action to get their money. The IRS will automatically issue the portion of the economic impact payment that was applied to the other spouse’s debt.

The IRS is aware that some individuals did not file a Form 8379, Injured Spouse Allocation, and did not receive their portion of the economic impact payment for the same reason above. These individuals also do not need to take any action and do not need to submit a Form 8379. The IRS does not yet have a timeframe but will automatically issue the portion of the economic impact payment that was applied to the other spouse’s debt at a later date.

Affected taxpayers can check the status of their economic impact payment by using the Get My Payment tool, available on IRS.gov.

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2020, taxpayers who expect to owe for 2019 should have their 2019 income tax returns done now so that the 2019 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2020.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

Click here for COVID-19 Tax Relief measures instituted by the IRS in “The IRS People First Initiative” that can benefit you. 

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Paycheck Protection Program Changes Are Here!

Paycheck Protection Program Changes Are Here!

On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions.  One of the most publicized provisions is the access of funds through banks to qualifying businesses and self-employed taxpayers to pay for payroll, insurance premiums and mortgage, rent and utility payments.  This is known as the “Paycheck Protection Program” (PPP).

Under this program, small businesses with 500 or fewer employees including not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors are eligible for loans to pay up to eight weeks of payroll costs including benefits as well as other costs. The PPP launched in early April with $349 billion in funding that was exhausted in less than two weeks. Congress then provided an additional $310 billion in funding.

However, there has been criticism of this program as many businesses have been subject to continued lockdown orders preventing them to achieve loan forgiveness within the original 8-week timeframe, and businesses located in metropolitan areas with higher-than-average rent expenses who would have greater difficulty achieving loan forgiveness within the pre-existing terms of PPPP.  So on June 5, 2020 President Trump signed the Paycheck Protection Flexibility Act which makes it easier for businesses to secure the full benefits provided in this program.

What can PPP funds be used to pay?

PPP funds can be used to pay payroll costs including benefits (with salaries being under $100,000 per employee), interest on mortgages, rent payments, and utility bills; however, no more than 40% (was previously 25%) of the funds can be used for non-payroll costs.

What counts as payroll costs?

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

What counts as non-payroll costs?

  • 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.

Under what circumstances do I have to repay these PPP funds received?

The loan of the PPP funds will be forgiven if you maintain your pre-existing employees at their pre-existing salary levels.  Also, that you do not pay out more than 40% (was previously 25%) of the PPP funds for non-payroll costs specifically limited to: interest on mortgages, rent, and utilities.

How soon can one apply?

Starting April 3, 2020, small businesses and sole proprietorships affected by the coronavirus pandemic can apply for loans under the PPP.  Independent contractors and self-employed individuals can apply starting April 10, 2020.  The application period ends June 30, 2020.

Where do I apply?

The application can be found here on the United States Treasury website, along with details for borrowers and lenders.  After completing the application, you would then go to any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders.

How large can my loan be?

Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount. That amount is subject to a $10 million cap. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.

How many loans can I take out under PPP?

Only one.

Are there any charges or requirements for collateral or personal guarantees?

No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

What if I do not spend all the funds or make non-qualifying expenditures?

The amount of loan forgiveness will be reduced including if full-time headcount declines or if salaries and wages decrease.  Also, if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments over the 24 weeks (was previously 8 weeks) after getting the loan.  Current PPP borrowers who applied before June 5, 2020 can keep the original eight-week period if they choose not to extend the period to 24 weeks.

Do I need to restore workforce levels and wages to pre-pandemic levels?

Yes, but borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels in order to apply for full forgiveness. This must be done by December 31, 2020 (was previously June 30th).

Are there any exceptions to secure loan forgiveness if not fully restoring workforce levels?

Yes, there are two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce.

  1. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic.
  2. The new law allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to February 15, 2020, levels due to COVID-19 related operating restrictions.

How can I request loan forgiveness?

You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.

Can I appeal a decision by the lender denying loan forgiveness?

Yes.

What is my interest rate?

1% fixed rate.

When do I need to start paying interest on my loan?

Unless the loan is forgiven, all payments are deferred for 10 months (was previously 6 months) after the end of the covered period; however, interest will continue to accrue over this period.

When is my loan due?

In 5 years (was previously 2 years). Current PPP borrowers who applied before June 5, 2020 can keep the original 2-year period if they choose not to extend the period to 5 years.

Can I pay my loan earlier than 5 years?

Yes. There are no prepayment penalties or fees.

Can I delay payment of payroll taxes as provided under the CARES Act?

Yes (was previously no).  The CARES Act provides for a deferral of the employer’s share of payroll taxes for the period beginning on March 27, 2020 to January 1, 2021.

What Should You Do?

Let the attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California assist you in securing the maximum amount of financing allowed and to maximize the amount of loan forgiveness.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

U.S. Attorney’s Office Files Charges In Rhode Island Against Two Borrowers Alleging Fraud In Seeking Paycheck Protection Loans

U.S. Attorney’s Office Files Charges In Rhode Island Against Two Borrowers Alleging Fraud In Seeking Paycheck Protection Loans

This is the first case in the nation to be charged with fraudulently seeking CARES Act SBA Paycheck Protection Loans.

The U.S. Attorney’s Office for the District Of Rhode Island announced on May 5, 2020 in a press release that two businessmen have been charged with allegedly filing bank loan applications fraudulently seeking more than a half-million dollars in forgivable loans guaranteed by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Charges Filed By The U.S. Attorney’s Office

David A. Staveley, aka Kurt D. Sanborn, 52, of Andover, Massachusetts, and David Butziger, 51, of Warwick, Rhode Island, are charged with conspiring to seek forgivable loans guaranteed by the SBA, claiming to have dozens of employees earning wages at four different business entities when, as alleged by prosecutors, there were no employees working for any of the businesses.

Staveley and Butziger are charged by way of a federal criminal complaint with conspiracy to make false statement to influence the SBA and conspiracy to commit bank fraud. Additionally, Staveley is charged with aggravated identity theft. Butziger is charged with bank fraud.

According to court documents unsealed in U.S. District Court in Providence, Rhode Island, the fraudulent loan requests were to pay employees of businesses that were not operating prior to the start of the COVID-19 pandemic and had no salaried employees, or, as in one instance, to pay employees at a business the loan applicant did not own.

Allegedly, Staveley and Butziger discussed via email the creation of fraudulent loan applications and supporting documentations to seek loans guaranteed by the SBA for COVID-19 relief through the Paycheck Protection Program (PPP). It is alleged that Staveley posed as his brother in real estate transactions.

It is alleged that Staveley claimed in loan applications requesting more than $438,500 that he had dozens of employees at three restaurants he owned, two in Warwick, Rhode Island, and one in Berlin, Massachusetts. An investigation determined that one of the Rhode Island restaurants, the former Remington House, and the Massachusetts restaurant, On The Trax, were not open for business prior to the start of the COVID-19 pandemic, at the time the loan applications were submitted, or at any time thereafter. Moreover, Staveley did not own or have any role in the second Rhode Island restaurant, Top of the Bay, for which he was seeking financial relief.

According to court documents, Staveley’s Massachusetts restaurant was closed by March 10, 2020, when the town of Berlin revoked the business’ liquor license for numerous reasons, including that “Sanborn” allegedly misrepresented that his brother owned the restaurant. Investigators obtained information that Staveley/Sanborn allegedly used his brother’s personal identifying information in other real estate transactions as well.

According to court documents, it is alleged that on April 6, 2020, Butziger filed an application seeking a $105,381 SBA loan under the PPP as owner of an unincorporated entity named Dock Wireless.  Butziger claimed in documentation filed with the bank and in a telephone call with an FBI undercover agent posing as a bank compliance officer that he had seven full-time employees on Dock Wireless’ payroll, including himself. Butziger falsely represented to the agent that he brought the employees on full-time on January 1, 2020, and laid them off at the end of March. Butziger claimed the employees continued to work without being paid through April 2020, and that he would use SBA PPP funds to pay them.

The Rhode Island State Department of Revenue provided information to the IRS of having no records of employee wages having been paid in 2020 by Butziger or Dock Wireless. Agents interviewed several of the supposed Dock Wireless employees who reported that they never worked for Butziger or Dock Wireless.

Keep in mind that the filing of charges in a federal criminal complaint is merely an accusation. A defendant is presumed innocent unless and until proven guilty.

The CARES Act

The CARES Act is a federal law enacted on March 29, 2020, designed to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic.  One source of relief provided by the CARES Act was the authorization of up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses, through the PPP.  In April 2020, Congress authorized over $300 billion in additional PPP funding.

The PPP allows qualifying small-businesses and other organizations to receive loans with a maturity of two years and an interest rate of 1%.  PPP loan proceeds must be used by businesses on payroll costs, interest on mortgages, rent, and utilities.  The PPP allows the interest and principal to be forgiven if businesses spend the proceeds on these expenses within eight weeks of receipt and use at least 75% of the forgiven amount for payroll.

On April 23, 2020, the SBA issued guidance in the form of an additional FAQ. The guidance, outlined in FAQ 31, reminds borrowers that they “should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

More specifically, FAQ 31 provides:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

Ramifications for Certifications Not Made in Good Faith

Borrowers that fail to make their certifications in good faith may be subject to civil and criminal penalties. Any borrower who knowingly makes a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable under the law, including 18 USC §§1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC §645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a Federally insured institution, under 18 USC §1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.  The Federal District Courts could expect to see more of these cases as the SBA and U.S. Treasury audits any borrower that has received over $2 million in PPP loan proceeds and conducts spot checks for smaller loans.

What Should You Do?

Whether you are looking to legally optimize the disbursement of your PPP Loan proceeds to assure loan forgiveness or defending charges of certification not made in good faith, it is important that you seek legal counsel as soon as possible to preserve your rights and/or mitigate your losses.  The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California know exactly what to say and how to handle issues with Federal agencies including the SBA, U.S. Treasury and the IRS.  Our experience and expertise not only level the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.  Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

https://cannabistaxattorney.com/how-some-cbd-companies-are-getting-millions-in-federal-aid-through-a-loophole-in-the-cares-act/

On March 27, 2020 President Trump signed the $2 trillion Stimulus Bill formally known as the Coronavirus Aid, Relief and Economic Security [CARES] Act (the “CARES Act”) to provide assistance to workplaces and employees. The CARES Act provides many benefits intended to deliver cash into the hands of individuals and businesses, as well as many other tax provisions … but if you are in the cannabis business, you need to look elsewhere for relief. 

CARES Act Relief For Businesses 

The CARES Act offers the following two major “stimulus” provisions for businesses: the Employee Retention Credit and the Paycheck Participation Program. 

Employee Retention Credit 

Eligible employers are allowed a credit against employment taxes for each calendar quarter equal to 50% of qualified wage (including health benefits) paid to employees.  This amount is limited to $10,000 of wages paid to an employee for all calendar quarters.

An eligible employer is one which is in a trade or business:

  1. Whose operation is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
  2. Who has a “significant decline” in gross receipts (i.e., there is a decrease to less than 50% of the gross receipts for the same quarter in the prior year).

 

Different rules apply as to the covered wages depending upon the number of employees the employer had in 2019. Tax exempt entities are also able to take advantage of this credit.  However, this credit is not available to employers receiving a Small Business Interruption Loan under section 1102 of the Act or if a Work Opportunity Tax Credit is allowed for the employee.

Unfortunately, this credit is not be available for state-licensed cannabis businesses as cannabis is a Schedule I controlled substance under Federal law. 

Paycheck Participation Program (“PPP”)

Under this program, small businesses with 500 or fewer employees including not-for-profits, veterans’ organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors are eligible for loans to pay up to eight weeks of payroll costs including benefits as well as other costs.

 

PPP funds can be used to pay payroll costs including benefits (with salaries being under $100,000 per employee), interest on mortgages, rent payments, and utility bills; however, no more than 25% of the funds can be used for non-payroll costs.

 

The loan of the PPP funds will be forgiven if you maintain your pre-existing employees at their pre-existing salary levels.  Also, that you do not pay out more than 25% of the PPP funds for non-payroll costs specifically limited to: interest on mortgages, rent, and utilities.

 

The application can be found here on the United States Treasury website, along with details for borrowers and lenders.  After completing the application you would then go to any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of Small Business Administration (SBA) lenders.

 

Unfortunately, the SBA is prohibited from administering any loans to cannabis businesses as cannabis is a Schedule I controlled substance under Federal law (Controlled Substances Act 21 U.S.C. 801). 

But What About The Hemp And CBD Products Market? 

Well because of the Federal government’s enactment into law of the 2018 Farm Bill which removed cannabis containing less than 0.3% THC from the list of controlled substances, hemp and CBD companies qualify for SBA’s relief programs.

According to VICE News who reviewed SEC filings of CBD products companies, they found three CBD companies that successfully secured funds under the PPP, specifically:

 

 

Together these three large online CBD products retailers have received more than $4 million in PPP money and it is very likely that many other smaller CBD products companies and Hemp companies also were successful in getting PPP funds.  Thus, leaving state-legal medical and recreational cannabis businesses to fend for themselves.

Given That COVID-19 Tax Relief is not available for state-licensed cannabis businesses, U.S. Senators Are Urging Change. 

A coalition of U.S. Senators are urging leadership to permit licensed cannabis operators to qualify for loans and other forms economic assistance available from the SBA.  In a March 26, 2020 letter addressed to the Chairman and Vice-Chair of the Senate Committee on Appropriations, the senators urge “the Subcommittee on Financial Services and General Government to include language in … forthcoming legislation to help extend SBA loan programs to legal cannabis businesses.”

Senators Michael Bennett (), Cory Booker (D-NJ), Tammy Duckworth (D-IL), Kirsten Gillibrand (D-NY), Kamala Harris (D-CA), Edward Markey (D-MA), Robert Menendez (D-NJ), Jeffrey Merkley (D-OR), Jacky Rosen (D-NV), Bernie Sanders (D-VT) and Ron Wyden (D-OR) signed on to the letter.

Emergency Cannabis Small Business Health and Safety Act Introduced April 23, 2020

On April 23, 2020, Representatives Earl Blumenauer (D-OR) and Ed Perlmutter (D-CO) introduced the Emergency Cannabis Small Business Health and Safety Act in the House of Representatives. This legislation would allow legal cannabis businesses to be eligible for the SBA services provided in the CARES Act. Query if this even passes whether cannabis businesses will receive any benefit in the PPP as a vast majority of the funds administered by the SBA have already been allocated to qualified businesses.

But until Federal law changes, the cannabis industry will still have to bear the followings risks and challenges: 

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

 

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

 

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

 

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

 

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records. 

 

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  Also, if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.