Self-Employed Farmers Need SBA Guidance Now!

• April 12, 2020
• Paul Neiffer

We thought that the SBA would provide guidance to self-employed owners for the Paycheck Protection Program (PPP) loans sometime last week since farmers could apply for these loans starting on Friday April 10.  However, this was not to be and we need some answers quickly to important questions.

Before we review the questions that needs answers, it is important to provide the wording from the CARES Act that outlines self-employment income.  We may be getting hung up on the earnings from self-employment being the correct answer and a much simpler approach is allowed.  Here is the actual wording from the law:

“(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation..”

This leads us to believe that a farmer who simply receives total farm income payments exceeding $100,000 automatically qualifies for the maximum loan they can receive of $20,833 (plus any other payments based on qualifying group insurance, retirement payments or state and local taxes on this income).  There appears to be no requirement for the farmer to show net income from being self-employed.  It simply states the sum of payments of any compensation or income of the farmer.

If so, this really expands and makes simple for the self-employed farmer to qualify for the maximum $100,000 compensation level (i.e. $20,833 loan amount).  This assumes their gross farm receipts exceeds $100,000.

Now, an important question for the SBA is to determine what other payments also qualify.  For example will the self-employed health insurance premium paid fully qualify?  What about retirement payments?  Will an IRA qualify or will it need to be some type of profit sharing or other type of retirement plan payments?  Are there any state or local taxes that qualifies for these payments?

Here are some of the other key questions that need answers.

• If a SE operation has both employees and earnings from SE income, does the application cover both the business with the employees and the SE income or are these two separate applications?  We have heard of some banks saying you can only apply for either the employees or the SE income but not both.  This does not make sense.
• What about partnerships?  Is the income based solely on the guaranteed payment received by the owners and does the partnership files an application using the guaranteed payment as part of payroll costs or does each partner file for a loan based on their guaranteed payment plus net earnings from the partnership? 
• Or if the partnership has gross receipts greater than $100,000 times the number of partners, does it automatically qualify each of the partners for the full $20,833 loan amount.
• If farmers are in multiple entities that are treated as self-employed entities, can each entity provide a qualifying loan to the farmer of $20,833 or is the farmer limited to one $20,833 loan amount?
• If a farmer receives wages over $100,000 from an S corporation or C corporation, does this disqualify them from receiving a loan from a partnership or Schedule F?
• What about farmers who have a large gain reported on Form 4797 from trading in farm equipment and now show a loss on Schedule F?  Combined income is well over $100,000 but based on “SE” income, there is no qualified SE income.  Does this even matter if gross receipts of the Schedule F exceeds $100,000?
• How is the loan forgiveness calculated for SE income?  There is no “salary or wage” payment to the owner, but the owner is spending money on operations.

These are some of the most important questions and we are sure there are others that we did not list.

For purposes of calculating loan forgiveness, we would base this on the amount of proceeds used by the farmer to cover farm operating costs.  For example, assume that a farmer receives a $20,000 loan and during the 8 week covered period, she spends at least $20,000 on farm operating costs.  In this case, 100% of the loan would be forgiven.

One other item that has been brought up is that any loan forgiveness may make the expenses used in calculating the forgiveness portion non-deductible.  There is a tax provision that indicates you are not allowed to deduct expenses used for non-taxable income.  For example, assume you borrow money to buy municipal bonds.  The interest on the bonds are tax-free, however you are not allowed to deduct the interest.  This likely needs Congress to step in and indicate whether the expenses are deductible or not.  Hopefully this is addressed in the next round of PPP funding which may occur this week.

 

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