Any Business Concern Means Any Business Concern!
Perhaps the Small Business Administration and its workers should not have been in charge of implementing the new Paycheck Protection Program (PPP). However, they likely were the only entity that could handle this process on a timely basis, but the issue arises that most of the workers in the SBA are used to dealing with implementing a “small business concern” loan. These loans are what they normally handle on a day-to-day basis and are very familiar to the SBA and its workers and they seem to be interpreting the new PPP using that criteria.
The concern for farmers is that under the “small business concern” definition there is a dollar revenue limit for most farm operations. As an example, soybean farming is the first NAICS industry listed under Agriculture and its revenue limit is $1 million. The $1 million revenue limit also applies to corn, wheat, rice and almost every other farm industry listed including cattle, dairy and hogs.
If this was the actual PPP law under the CARES Act most farmers would not even waste their time applying for the loan since their revenues are well over $1 million.
However, Section 1102 of the CARES Act adds Section 7(a)(36)(D)(i) that specifies what businesses qualify for PPP and it does not stop with a small business concern.
First it starts with “small business concerns” (which is what we just discussed). However, it then adds three key words – “any business concern” and then adds in nonprofits, etc. A farm is any business concern. So it would automatically qualify. However, we then need to keep reading in that section to see if any other restrictions apply and we find there are two size restrictions.
The first restriction is that the farm can’t employ more than 500 employees (most farms meet this restriction).
The second restriction states a business can have more than 500 employees if its industry under the SBA regulations allows for more employees. For example Gold Ore Mining (NAICS code 212221) allows 1,500 employees. All of farming appears to be limited to 500.
As an example, a gold mining company could have 1,247 employees and even though it is larger than 500, it still can apply for a PPP loan. However, a dairy could have 502 employees and it would not qualify for the PPP.
The law simply refers to the size standard in number of employees that the SBA uses for each industry. The law does not restrict eligibility for a PPP loan based upon dollars of revenue. The size standard does appear to incorporate both full-time and part-time employees in their employee count. This could be very problematic for farm operations with lots of seasonal workers but that will be for another blog post.
Now the problem is that many SBA personnel are used to the size and revenue standards that they have been in place for several years and therefore, they believe they apply to the PPP. Even the American Bankers Association in a FAQ just released on the PPP appears to refer to the dollar revenue limitation. The problem with this is that many bankers will rely on the ABA to help them implement the program and if they see this FAQ will assume the ABA is correct and therefore will reject any farmer’s application whose revenue is over $1 million.
There are a few more reasons why revenues don’t matter. The application does not ask for any revenue amount to be listed. It simply asks for total payroll costs and the formula to arrive at the applicable loan amount. The documentation that the SBA is requiring does not deal with revenues. It only asks for payroll information plus utilities, rents and mortgages that were in place as of February 15, 2020. The Treasury Department also issued a Fact Sheet that references 500 or fewer employees with no revenue limits.
We know that this post has been a little more technical than usual, but it is extremely important to make sure we follow the law that was made not simply the rules in place before the law was made.
If you have a banker that mentions the revenue limit, show them this blog post and we know that appropriate farmer advocate groups are already working to get this fixed.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I didn’t think farms (ag) qualified as they were considered an essential industry. I was under the impression that a farm would have a hard time proving a COVID hardship.