With various stay-at-home orders put in place across the country to help “flatten the curve” as part of the response to the coronavirus pandemic, three federal stimulus bills were signed into law in the last few weeks and are now being rapidly rolled out. These stimulus packages seek to provide direct funds, tax incentives and other relief measures to individuals and businesses in an attempt to support the economy while we significantly alter our daily lives by shifting to a culture of minimizing in-person contact unless obtaining or providing a service essential to critical infrastructure. While these significant restrictions on movement are temporary, the disruption to daily life anticipated for the next few months is causing unprecedented economic consequences.
For cannabis businesses, the almost immediate widespread acknowledgment that marijuana serves an essential need has become a bit of a silver lining. Despite its recognition as essential in virtually all of the states that have state-legal medical marijuana programs, adult-use marijuana businesses are not necessarily given the same credence. Additionally, hemp-related businesses, especially those that deal with CBD and other consumable cannabinoid products that are legal under federal and state law, are nonetheless facing a patchwork of guidance across states and even within states as to whether those businesses are deemed essential and permitted to continue operating. As a result of the significant disruption in business, many cannabis businesses are raising questions related to labor and employment issues, breaches of contract, insurance coverage and other business concerns. For some cannabis businesses, federal and state relief may be available to maintain continuity during these challenging times, while some will need to look to alternative or additional relief to stay afloat. Interestingly, and not surprisingly to many, marijuana businesses are uniquely positioned to weather this downturn quite well, despite being unable to access federal relief.
Whether a cannabis business is eligible for certain stimulus programs is determined by the nature of the business’s specific operations. For example, the Small Business Administration’s (SBA) Standard Operating Procedures for several of its loan products distinguish among (i) direct marijuana businesses (i.e., growers, producers, manufacturers, sellers of marijuana products), (ii) indirect marijuana businesses (including many businesses that derive a portion of their income from supplying products or services to direct marijuana businesses), and (iii) hemp businesses (i.e., growers, producers, processors, distributors or sellers of hemp products). Hemp-related businesses are eligible for relief from the SBA and other federal relief efforts. Marijuana businesses, which remain federally illegal under the Controlled Substances Act (CSA), are not eligible for the SBA programs and generally ineligible for federally funded programs altogether, although there might be relief available at the state or local level depending on the jurisdiction. These businesses should consult with a CPA or tax attorney well versed in taxation related specifically to marijuana businesses to explore if and how certain tax incentives may be accessible.
Alternatively, processors, manufacturers, testing labs or other cannabis supply chain participants that are able to pivot to COVID-19 preparedness and response activities (for example making hand sanitizer or other needed products or services) should explore whether they may be able to access relief funds or other stimulus incentives. Future guidance or a subsequent stimulus bill may provide protections or support for marijuana businesses providing essential products, and we implore industry participants to band together and push for this to happen.
In this series of posts, we share information about the various relief opportunities that may be available for cannabis businesses experiencing financial woes due to the COVID-19 pandemic, including federal stimulus relief, general business dispute resolution methods, and potential insurance claims and also share a few options specific to Texas and Louisiana, and more. It is important to note that additional guidance is being published frequently that could alter the information presented here and it is highly recommended you seek assistance from experienced legal and accounting professionals to advise you as to whether and how these may apply to your particular circumstances.
In Part I, we explore relief opportunities for hemp businesses under the federal stimulus packages (as stated above, marijuana businesses are largely excluded from obtaining this relief and will likely not qualify for most of these).
Stimulus Package #1: Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020
(March 6, 2020; P.L. 116-123)
Provides $20,000,000 to the SBA for Economic Injury Disaster Loans (EIDLs) as an expansion of its already robustly funded Disaster Loan Program, in addition to providing funds to the Food and Drug Administration, Centers for Disease Control and Prevention, National Institutes of Health, other Department of Health and Human Services offices, Department of State and other federal agencies. The EIDL program is available for small businesses, co-ops, sole proprietors, independent contractors and most nonprofits. It provides for low-interest loans up to $2,000,000 with relaxed underwriting requirements and deferred payments for 1 year.
Stimulus Package #2: Families First Coronavirus Response Act
(March 18, 2020; P.L. 116-127)
Provides paid sick leave for certain employees, expands coverage under the Family and Medical Leave Act (FMLA), creates payroll tax credits to reimburse employers for provision of the COVID-19 sick leave and paid FMLA leave, requires insurers to cover all costs of COVID-19 testing, and expands food assistance, including SNAP and WIC, and provides federal funding for extended unemployment benefits. It also provides additional funding to the Department of Defense, Department of Health and Human Services, Department of Veterans Affairs, and other federal agencies, as well as assistance for national school lunch programs. Hemp businesses that qualify will need to provide these employee benefits and will be eligible to receive the credits. For additional information, our Firm provided a summary of the expanded paid leave and payroll tax provisions here.
Stimulus Package #3: Coronavirus Aid, Relief and Economic Security (CARES) Act
(March 27, 2020; P.L. 116-136)
Provides for an enormous $2.2 trillion stimulus package for economic assistance to certain businesses (including nonprofits and veterans organizations), public entities and qualifying individuals through the creation or expansion of SBA programs and IRS tax incentives briefly described below. Considering there are about 30 million small businesses in this country, this stimulus package will help provide support to several million people as they are structured in ways to incentivize employee retention and support continued operations through the difficult, but hopefully short, times ahead. The comprehensive legislation also includes provisions for certain grants to small business development centers, women’s business centers, minority business centers and minority chambers of commerce. The CARES Act also provides an extension of the State Trade Expansion Program, additional funding for various SBA programs and services, measures to increase the amount of participating lenders for these programs, reorganization and bankruptcy relief, student loan relief and unemployment assistance. The much-discussed individual “stimulus checks” are also authorized under this bill, as are relaxed penalties relating to early withdrawal from retirement accounts, and bailout provisions for healthcare and airline industries, measures to address medical supply and emergency drug shortages, expansion of health care access, and much more. A more expansive summary of the business-related provisions of the CARES Act stimulus package is available on our website here.
Small Business Funding Assistance:
- Payroll Protection Program: $349 billion allocated to the SBA to implement a partially forgivable loan program to cover payroll and other qualifying expenses with short-term deferred payments, broad eligibility requirements, less restrictions than other SBA loan programs, and an application process that is intended to be completed easily and promptly. The forgivable portion covers qualified expenditures made during the 8 weeks following the loan closing, with the remaining amount continuing to be financed on below market terms, and the bill removes any phantom income concerns related to the forgivable portion. The applications for small businesses and sole proprietorships opened up on April 3, 2020 and will open April 10, 2020 for independent contractors and self-employed individuals. Applications must be made directly with participating banks. This program is expected to become oversubscribed very quickly so potential applicants should not wait to apply.
- Express Loan Program Cap Increase: The maximum loan amount under this rapid-funding program increases to up to $1,000,000 through the end of this year (from the regular cap of $350,000). While not part of the CARES Act, the Express Bridge Loan Pilot Program was expanded on 3/25/2020 to cover small business impacted by COVID-19. The EBL Pilot program allows small businesses that have existing relationships with an SBA Express Lender to quickly access up to $25,000 while awaiting a decision on the EIDL program, at which time the Express Bridge Loan can be refinanced by the EIDL.
- Economic Injury Disaster Loan Emergency $10,000 Advance: $10 billion allocated to the SBA to provide advances up to $10,000 to EIDL applicants that do not need to be repaid as part of the EIDL program authorized under COVID-19 Stimulus #1. These EIDL emergency advances are a feature of the EIDL program and would be funded within a few days of the general EIDL application submission to eligible small businesses (including certain agricultural co-ops) who apply for an EIDL and check the box for the optional emergency advance as part of the general application. This grant-styled option can be obtained even if the EIDL is subsequently denied, and would be deducted from the forgivable portion of the Payroll Protection Program loan if funds from that program are also obtained. The online application to initiate the loan approval process is available here and requires minimal information, but you will need to provide gross revenues and costs of goods sold for the prior 12-month period, and be sure to check the Emergency Loan Advance box at the end of the application. While this program does not terminate until the end of 2020, the Emergency Advance opportunity is expected to become oversubscribed so potential applicants should not wait to apply.
- Existing SBA Loan Subsidy/Debt Relief: $17 billion allocated to the SBA to relieve certain existing SBA Loan borrowers of their obligations to pay principal, interest and fees for 6 months while the SBA pays the applicable lender instead, in addition to mandating deferral of payments for 6 months for all eligible SBA loans regardless of whether the subsidy also applies. Borrowers of existing SBA loans should contact their lenders as soon as possible to take advantage of this relief
Employer Tax Incentives:
- Tax credit for paid FMLA and Sick leave: tax credits against the employer portion of Medicare and Social Security employment taxes equal to 100% of the paid leave required by the Families First Act, with certain caps as follows: sick leave for tending to employee’s own health needs is capped at $511 per day per employee up to $5,110 in the aggregate; and sick leave provided to employees to care for their family members is capped at $200 per day per employee up to $2000 in the aggregate. The tax credit for paid FMLA leave required to be provided under the stimulus is capped at $200 per day per employee up to $10,000 for all calendar quarters. In addition, employers are permitted to seek an advance of the tax credit as opposed to having to claim the tax credit on a reimbursement basis.
- Employee retention tax credit: credit equal to 50% of the first $10,000 of qualified wages paid per employee, available to employers whose (1) operations were fully or partially suspended due to a government shut-down order, or (2) gross receipts declined by more than 50% over the same quarter in the prior year.
- Social Security tax deferral: Section 2302 permits employers and self-employed individuals to defer payment of the 6.2% Social Security tax during the period beginning on March 27, 2020 to December 31, 2020, to be paid over the next two years, with half of the deferred tax to be paid by December 31, 2021 and the other half by December 31, 2022.
- Treatment of Alcohol used to Make Hand Sanitizer: For 2020, the CARES Act is temporarily waiving excise taxes for alcohol used to produce hand sanitizer and relaxing bulk sales and labeling regulations regarding the same. Some companies (including marijuana and other cannabis businesses as mentioned above) have changed course to produce hand sanitizer, so particular attention should be paid to this provision, in addition to other recent related guidance from the FDA and TTB (see here, here, here and here). For those cannabis companies that have already or are considering going this route, this relief may be available.
Agriculture Sector Relief:
Provides $9,500,000,000 to support agricultural producers, $14,000,000,000 to the Commodity Credit Corporation for support of its various programs, and $20,500,000 for the USDA Rural Business Program Account rural business development program loans. Due to the 2018 Farm Bill’s qualification of hemp as an agricultural commodity, we expect that hemp-related businesses would generally have access to the same programs and emergency federal funds as other businesses impacted by the COVID-19 epidemic. A brief description of some of the USDA stimulus resources available was put together by our Firm and can be found here.
Copyrights, Trademarks & Patents Relief:
Many cannabis-related businesses have intellectual property interests they are seeking to have protected or are already under certain protections. The CARES Act provides for the U.S. Patent and Trademark Office to grant certain extensions and waivers and they have done so with respect to certain copyright, trademark and patent matters by extending certain timing requirements and filing deadlines and granting fee waivers.