You are here
USDA giveth to corn farmers, the IRS taketh away
The coronavirus-related government programs are coming out so fast that the nation’s tax accountants are literally in information overload.
We have been trying to advise clients about tax laws, IRS guidance, and SBA rules, sometimes the day after they’re issued. Clients want hard and fast answers, but we’ve occasionally had to give this answer: “I’m not sure what will happen.”
That said, let’s look at the various kinds of government payouts and how they will be taxed. (Caveat – all of these rules are as of June 1, 2020, and could change in a matter of days.) The most common issue lately has been Paycheck Protection Program loans. For those who have the loans, here are the main questions and answers.
1. What can I spend the proceeds on and have the loan forgiven? Under the rules today, you have to spend at least 75% of it on compensation. That includes cash wages of up to $15,385 per person for an eight-week period, which is the equivalent of $100,000 in annual wages. It also includes “non-cash compensation” costs of health insurance, retirement plan contributions, and state/local payroll taxes. Additionally, there is a head-count factor to the calculation of debt forgiveness. To get the full loan forgiven, you need to have as many full-time equivalent employees and pay them the same or more monthly during the loan forgiveness period as you did either in January and February of 2020 or February 15 through June 30 of 2019. The other 25% of the loan proceeds can be spent on mortgage interest, equipment loan interest, rent, or utilities. Utilities can include electric, gas, water, telephone, and internet.
2. When do I have to spend it? Currently, you have eight weeks following the date that the loan was funded to spend the money on forgivable expenditures. Note that the forgiveness period may be extended by Congress to 16 weeks, or any other number, before this year is over. For payroll costs, that means payroll paid or payroll incurred. So, the paycheck dates can fall slightly outside of the forgiveness period, provided you already owe the employee for work performed as of the end of the period.
3. Who will look at my supporting records? The lender’s loan operations staff will review your application for forgiveness and the support. Bigger loans (above $2 million) may be subject to the Treasury Department auditing the support. Of course, any business could be audited in any year, and an IRS agent could look at PPP accounting as part of his or her audit – even two or three years from now. I have heard from bankers that they’re worried about their ability to review and approve the supporting records for thousands of PPP loans, so make it as easy as possible for them.
4. Will I be taxed on the debt forgiveness? Technically, no, but effectively, yes. The debt forgiveness will not be taxable, but current rules say that the expenses you pay with the forgivable loan funds will not be tax deductible. Losing deductions is the same thing as gaining revenue, for tax purposes. Again, this could easily change by the end of the year.
Self-employed Schedule F farmers without employees have some slightly different rules on the PPP debt forgiveness front. They were allowed to request a loan of up to 2.5 months of their 2019 farm profit. The owner compensation piece of the forgiveness will be 8/52 of the 2019 profit, limited to a $100,000 maximum profit. This could be 16/52 if the forgiveness period gets extended to 16 weeks, or an entirely different calculation, if Congress changes the rules for sole proprietor forgiveness. A sole proprietor can also get forgiveness on interest, rent, and utilities, as described in #1.
There is also the matter of tracking how the PPP loan proceeds were spent. If you opened a new separate PPP bank account at your lender, it will be a little easier. Just have the back-up ready for each account disbursement. If you deposited the proceeds into your existing operating account, you might want to create a separate spreadsheet for the PPP-funded payroll costs, interest, rent, and utilities.
Besides the PPP loans, some businesses have received an EIDL advance. EIDL stands for economic injury disaster loan. While technically it is an advance on a loan, it is effectively a grant. It can be used on any business expenditure and does not have to be paid back. Hence, the advance is taxable income. Note that you cannot get PPP debt forgiveness on the same business expenditures that you paid with an EIDL advance. (Some businesses received both PPP and EIDL funds.)
Other short-term programs for farmers include the Market Facilitation Program, the Coronavirus Food Assistance Program, and whatever else comes this summer – maybe the HEROES Act. The Market Facilitation Program aided farmers affected by foreign retaliatory tariffs, and those payments ranged from $15 to $150 an acre for 2019, depending on the county. It was about $65 an acre in the counties near me. Multiply that by 1,500 acres, and it was no small number – probably the difference between profit and loss on many small farms. At this time, it is unknown whether or not there will be an MFP payment for 2020.
However, there is a new program for 2020. According to the USDA, “The Coronavirus Food Assistance Program provides direct relief to producers who faced price declines and additional marketing costs due to COVID-19.” This program provides assistance of up to $250,000 per person. An LLC, a partnership, or a corporation with three active operators can get up to $750,000.
On the tax front, the name of the program payments really doesn’t matter. They are all taxed the same – as ordinary taxable income. Receiving a $10,000 program payment is just like receiving $10,000 in grain proceeds. Of course, more income means more income taxes.
And, with the progressive income tax rate system we have, the more you make, the higher the percentage you pay. A $50,000 program payment, when you have $44,000 of operating profit, will cost you approximately $6,000 in federal income tax (12%). However, an extra $50,000 program payment, when your farm operating net is $104,000, will cost you $11,000 in federal income tax (22%).
In the top tax bracket, $50K of income will cost you $18,500. On top of the federal income tax, there is state income tax of somewhere between 0% and 13%, depending on the state you live in. Schedule F filers also get to pay self-employment taxes (Social Security and Medicare) on program payments. So, as usual, you will have to do some prognostication when paying your quarterly estimated tax payments – not only what this year’s farm operating profit will be but also what this year’s program payments will be.
With this dizzying array of payments, I question the nation’s ability to account for all of it correctly, which is the first step toward getting the tax returns right. We have received many inquiries from bookkeepers on how to account for PPP loans and forgivable expenditures. My quick advice is to account for forgivable loans as regular loans until you have official notice that the loans are forgiven. At that time, the loan will be removed, and debt forgiveness income will be recognized on the income statement.