One of the few things more difficult than refraining from hugging close relatives and maintaining toilet paper supplies during the COVID-19 pandemic is navigating the litany of information surrounding government funding for agricultural businesses.
When the Small Business Administration released its second wave of Paycheck Protection Program funding on April 27, more producers had opportunities to apply in the second round of the program and with the announcement of agricultural applications for Economic Injury Disaster Loans on May 4, there are more opportunities than ever to take advantage of economic assistance programs and low interest loans.
PPP Eligibility and Parameters
One of the biggest questions surrounding PPP loans, especially in the first round, was eligibility for agricultural producers and misinformation surrounding the terms of the loans, dissuaded many agricultural businesses and farms from taking the plunge.
“Unfortunately, while ag businesses are eligible apparently some lenders were advising farmers that participation in the PPP would either reduce their USDA farm subsidies or eliminate their eligibility for them,” said Roger McEowen, professor of agricultural law and taxation at the Washburn University School of Law. “That is not true; there is no basis for reaching that conclusion based on the statutory language.”
While the agricultural nature of the business does not disqualify producers from receiving PPP capital, the farm or agricultural business’ success in 2019 has a direct impact on access to funding.
“While the SBA has clarified that Schedule F income can be used for computing loan eligibility, the SBA has taken the position that a loss on line 34 of Schedule F disqualifies the farm or ranch taxpayer from loan eligibility based on earnings,” McEowen said. “Thus, such a farmer can only qualify for a PPP loan based on employee payroll costs, if any.”
Producers farming as part of a partnership are also eligible for funding, however if the partnership receives a PPP loan, it precludes the partners from qualifying individually. The calculations associated with the partnership PPP loans are relatively complex and it is always a good idea to discuss application and repayment plans with a qualified financial advisor.
“A partnership can count all employee payroll costs for loan computational purposes and all self-employment income of partners reported on line 14a of Schedule K/K-1. That amount is then reduced by any I.R.C. §179 expense deduction claimed; unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties,” McEowen said. “The result is then multiplied by 92.35% to arrive at net self-employment earnings. If the final amount exceeds $100,000, it is to be reduced to $100,000. Whether that same computational approach applies to a Schedule F farmer is unclear.”
Another factor surrounding the PPP loans, is calculating and determining eligible wages.
“In computing eligible wages, S or C corporations are only allowed to use taxable Medicare wages & tips from line 5c of Form 941 — the Employer’s Quarterly Federal Tax Return,” McEowen said. “These wages are subject to FICA and Medicare taxes.”
If this method holds true and wages subject to FICA and Medicare taxes are the only eligible wages, agricultural business owners who pay their employees a commodity wage could have some eligibility limitations.
Likewise, producers who hire labor in the form of temporary agricultural workers (H2A workers) could see some eligibility restriction is the workers have been in the country less than 180 days.
“Certain sectors of the agricultural economy hire a significant amount of H2A workers,” McEowen said. “Recent guidance of the SBA and the Treasury indicate that wages paid to an H2A worker can count as eligible “payroll costs” if the worker satisfies the “principle place of residence” test under the Internal Revenue Code – at least 183 days present in the U.S. during the year.”
For PPP loans based solely on payroll to employees, the repayment process is pretty straightforward. Loan forgiveness for self-employed taxpayers is much more unclear. Recipients have an 8-week period to utilize their PPP loan to qualify for loan forgiveness. At least 75% of the funds must be spent on payroll with up to 25% available for spending on rents, mortgage interest, and utilities.
One major topic of debate among financial professionals has been whether the portions of the loan used on expenses will count for tax deductions. If they did, producers would be given a tax break as if they used out-of-pocket money toward expense, rather than the tax-free government payment —essentially double dipping. Recently, the Internal Revenue Service announced that would not be applicable in this case.
“Loan proceeds that are forgiven and are not included in the recipient’s income do not give rise to deductible expenses by virtue of I.R.C. §265,” McEowen said. “On April 30, the IRS agreed and now certain members of the Congress are putting pressure on the IRS to change its position.”
On May 4, SBA announced eligibility for Economic Injury Disaster Loans specifically geared toward agricultural producers. The loan advance would give producers up to $10,000 and would not have to be repaid.
One difference in EIDL and PPP loans is producers who showed a loss on the Schedule F tax returns in 2019 are eligible for EIDL, where they were not eligible for PPP. Eligible agricultural businesses can apply for both EIDL and PPP, but the funds cannot be used for the same purpose, for example both couldn’t be used for payroll expenses. EIDL has a broader range of applicable ways to spend the funds.
Applications for EIDL are available at https://covid19relief.sba.gov/. When navigating SBA applications and legality, its important to talk with a trusted financial advisor and to spend time researching options before committing to any loan. For more information about PPP and EIDL terms visit https://bit.ly/35XtExC.
(Editor’s note: Quotations from Roger McEowen are part of a larger article that can be found here.)