20.83333%

• April 1, 2020
• Paul Neiffer

Why would we start out our blog post with 20.83333%.  This is the maximum amount of loan that you can obtain under the Payroll Protection Program administered by the SBA.

When you take a number divide by 12 and multiply by 2.5 the resulting percentage is 20.8333% or you can round it to 21%.

A large majority of our farmers are self-employed and may not have much labor costs.  Some of are asking “Do I still qualify for a loan?” And the answer is yes or perhaps no.

First, you have to determine your net self-employment earnings (typically off of your Schedule F).  You then take that number and multiply it by 20.8333% and that is your maximum loan amount.  However, you are limited to $100,000 of net SE income, therefore your maximum loan as a SE farmer is $20,833.33 plus other qualified payroll costs that you may incur.

The reason we say no is that SE income typically requires the income to be subject to self-employment taxes.  Many farmers have net farm income but perhaps most of this income is from trading in farm machinery which is not subject to SE tax and their Schedule F may show a loss.  Will the SBA allow these farmers to include the gain from trading farm equipment?  We don’t know and it appears the self-employed loans are not available until April 10 so guidance on this may not be available for a few more days.

Payroll costs include:

• Salaries, wages, commissions or other compensation;
• Cash tips paid;
• Payments for vacation, parental, family, medical or sick leave;
• Allowances for dismissal or separation;
• Payments required for provisions of group health care benefits, including insurance premiums;
• Payments of any retirement benefits; and
• Payment of State of local payroll taxes.

In addition, the sum of payments of any compensation to or income of a sole proprietor or independent contractor of not more than $100,000 in a year period.

Therefore, if you hire an independent contractor to perform janitorial services on a weekly basis for your farm operation, you likely can include those costs even though they are not an employee.

There are certain items that are not allowed in this calculation:

• Compensation or self-employed earnings in excess of $100,000 (up to $100,000 is allowed, over that amount is ignored);
• Federal FICA and Medicare taxes plus Federal Income Tax Withholding are excluded (gross wages paid are allowed, however, the employer’s share of FICA, Medicare and the withholding is not an extra payroll cost to be included);
• Any compensation paid to employee whose principal place of residence is outside the United States (such as H2A workers and perhaps others that are here temporarily);
• Qualified Sick Leave and Family Leave Wages that receive a federal credit under the Families First Coronavirus Response Act.

Some commentators read the provision regarding FICA, Medicare and Federal Income Tax Withholding being excluded means that these items should be “subtracted” from allowed payroll costs.  My personal reading of this section is that they costs are simply excluded from payroll costs.  As an example, assume a farmer makes a $10,000 payment to an employee.  The FICA cost is $620 each for the farmer and the employee.  The Medicare cost is $145 each and let’s assume the federal withholding is $1,000.  The farmer will transmit to the IRS a total of $2,530 for all of these payroll and withheld income taxes.  In calculating what is allowed to be counted for loan purposes, it is only the wage paid of $10,000.  The farmer does not get to count the $2,530 but also does not subtract any of those costs from the $10,000.  Clarity is needed to make sure this is the correct interpretation since having to reduce for any of these costs could reduce the maximum loan available to the taxpayer.

So let’s work up some numbers:

Farmer Ben employs 9 full-time workers in a hog operation in Iowa.  Ben also provides health insurance for each of these employees and hires an independent contractor to come in and clean the hog barns on a weekly basis.  Ben also has a safe-harbor 401(k) plan that requires him to provide a 3% payment of wages.  Here is a calculation of his loan amount:

• Total annual wages are $450,000;
• State and local payroll taxes (state unemployment, worker’s compensation, etc.) total $55,000;
• Total net group health insurance costs total $60,000;
• Payments for cleaning hog barn equal $20,000; and
• 401(k) match payment of $13,500.

The total of these payments is $598,500 plus $100,000 of his net SE earnings (we are assuming Ben nets more than $100,000 in a year) for total covered costs of $698,500.  If we multiply this by 20.8333% we arrive at a loan of $145,521.

The loan amount will be fully forgiven as long as Ben spends at least this amount during the first 8 weeks after obtaining the loan on the following:

• Payroll costs (as defined above),
• Rents,
• Utilities, and
• Interest on mortgages incurred before February 15, 2020.

Continuing to provide payroll is the goal of the Program.  If you cut payroll costs by too much, part of the loan will not be forgiven even though in total you have spent more than the loan proceeds on payroll costs, rents, utilities and interest. 

The interest rate is .5% and the note is due in 2 years with no payments for the first six months.  Any loan amounts forgiven are non-taxable.

, Ag General, Ag Policy, Farm Taxes | 6 Comments »