A barely-known IRS credit scheme has allowed a multi-state marijuana operator (MSO) to earn millions of dollars in tax credits. Although cannabis firms remit hundreds of millions of dollars in taxes annually, federal law prevents them from claiming tax credits and deductions for operational expenses. However, Jushi Holdings took advantage of an obscure tax credit scheme to earn a little over $5 million.
The Boca Raton-based vertically integrated MSO was owed around $6 million worth of Employee Retention Credit (ERC) by the IRS but would have had to wait for several months to claim the credit. Rather than buckle down and wait, the cannabis operator sold the ERC claims to another party for $5.1 million in cash. ERC is a refundable tax credit for tax-exempt organizations and eligible businesses whose staff was impacted by the coronavirus pandemic.
Few cannabis firms have attempted to determine their eligibility for the tax credit in the years since the pandemic. Frost notes that while marijuana operators can still reap through the tax credit, they are running out of time. These firms have until April 15 to submit ERC claims for the 2021 tax year. Like Jushi, eligible companies that don’t want to wait for the IRS to pay out ERC claims can also sell their claims to third parties.
According to Jushi chief strategy officer Trent Woloveck, this is similar to invoice factoring where firms can sell pending invoices to third parties for cash. Woloveck explains that the IRS has taken its time delivering the ERC refunds to eligible companies in various industries, hence the decision to sell its claim to a third party.
Although the cash Jushi received was almost $1 million less than the value of its claim, Woloveck says it boosted the firm’s liquidity in its balance sheet. The IRS has already sent Jushi a $1.3 million check for previously filed claims and owes the multi-state operator $3 million in outstanding ERC claims. Woloveck says the firm expects the IRS to pay the remaining ERC claims ‘in due course.’
The Employee Retention Credit was included in the Coronavirus Aid, Relief and Economic Security (CARES) to incentivize businesses to retain their employees through the pandemic. Holland & Hart marijuana industry-focused lawyer Rachel Gillette notes that the IRS paid out the credits at a fast rate in the beginning but can now take up to 24 months to issue the credits to eligible companies.
It would be interesting to hear what other U.S. cannabis firms like TerrAscend Corp. (TSX: TSND) (OTCQX: TSNDF) think about the program that Jushi has leveraged to get millions from the IRS in tax credits.
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