As of June 6, 2020, over 129,000 farms (including forestry, fishing and hunting businesses) have received more than $7.6 billion in Paycheck Protection Program (PPP) loans. Congress recently updated the CARES Act PPP provisions with the PPP Flexibility Act, and it appears that your last chance to get a PPP loan is now June 30, 2020.
You now have 24 weeks to spend the proceeds on labor, interest, rents and utilities. If you spend all of the loan proceeds on these items, then you should have all of the loan forgiven, however, it may be reduced if your full-time employee equivalent is lower in the covered period than in certain discovery periods. For this column, we will assume there is no FTE reduction.
A forgiven PPP loan is tax-free to the farmer, but you will be required to reduce your expenses by the amount of forgiveness. This likely means no net tax benefit. However, Congress may change this to allow for a full deduction of these expenses. Let’s review the requirements for the different types of farm operations.
Schedule F Farmer with No Employees
Your loan was based on your 2019 net Schedule F farm income. Forgiveness is limited to 8 weeks of this income amount. It appears you are required to write yourself a check for this amount to get it forgiven. Any extra loan proceeds can be spent on interest, rents and utilities.
Example – Jane shows $100,000 of income on her 2019 Schedule F. She received a loan for $20,833. During her covered period, she writes a check to herself for $15,385. She also spends at least $5,448 on interest, rents and utilities. Therefore, the whole amount is forgiven. However, if she can only spend $2,000 on these items, then she will owe $3,448 with 1% interest amortized to be fully paid in 5 years (it could be 2 years).
Schedule F Farmer with Employees
The same rules apply except this farmer received extra funds for their employees and as long as they spend at least 60% of the proceeds on employee labor; write a check to themselves for the required amount; and spend the remaining loan proceeds on interest, rents and utilities; the loan should be fully forgiven.
A farm partnership’s loan amount is based on 92.35% of the partners’ self-employment income plus any employee labor. Forgiveness is very similar to a Schedule F farmer since they have to write a check to themselves for their “owner compensation” plus spend funds on payroll costs, interest, rents and utilities.
A corporation’s loan amount is based on total payroll costs including the owner’s salary. As long as they spend the proceeds as described above, they should get full forgiveness.
The Bottom Line: It is likely that most farmers will get full forgiveness on their PPP loans. However, for most, it will also require them to write a check to themselves. Make sure you don’t forget to do this.
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Paul Neiffer is a tax principal with CliftonLarsonAllen and author of the blog, The Farm CPA.