Technical Glitches
The SBA issued new guidance on Tuesday April 14, 2020 regarding self-employed (SE) “taxpayers”. The reason we put taxpayers in quotes is that it appears that most of the guidance is directed toward SE “employees” and not SE businesses.
Our last post reviewed most of the guidance but there does appear to be several glitches in the guidance.
It originally seemed to indicate that a SE business would get an automatic loan forgiveness based on 8 weeks of 2019 SE income. Then the remainder could be covered by spending money on interest, rents and utilities. It also expanded utilities to cover fuel for business vehicles (such as an Uber driver).
However, later on it then indicated that the only amount of loan forgiveness is this same 8 weeks of 2019 SE income. If this is true, SE businesses with lots of employees may be facing having very little of their loan ever forgiven.
Let’s look at an example: Jennifer files a 2019 Schedule F showing $400,000 of net income and has total payroll costs of $300,000. She qualifies for a loan of $20,833 on her SE income (limited to $100,000 of income) and $62,500 for her employees. During the 8 week period, she spends over $62,500 on payroll costs. Without the glitch, she would have the full $62.500 spent on payroll forgiven and likely has $15,385 forgiven on her SE income leaving $5,488 that she still owes to the bank. However, with the glitch, it appears that she may only have $15,385 forgiven leaving her on the hock for $67,948.
Is this really what the SBA intended?
Another glitch is dealing with LLCs taxed as partnerships. These farm entities can create a lot of business income, however, due to the structure of the tax laws, perhaps little of this income is being “taxed” as SE income. If the guidance issued this week stands, many farm businesses will qualify for very little PPP amounts based on their farm “SE income”.
Let’s look at an example: Ben, Mary and Paul farm together in a partnership. They each receive a guaranteed payment of $10,000 and split remaining profits of $300,000. Since Ben is the primary manager of the LLC, his net income of $110,000 is SE income and only Mary and Paul’s guaranteed payments qualify as SE income. Instead of all $330,000 of income qualifying for a PPP loan, only $120,000 will qualify (his is limited to $100,000) or a reduction in loan amount of $37,500 ($180,000 X 20.833%).
Is this really what the SBA intended?
Again, this guidance was only for SE “employees”. There still is no guidance for SE “businesses”. Here are the really key questions that the SBA needs to answer for SE farm businesses.
- What income counts? Under pre-TCJA tax law, trading in farm equipment had no effect on Schedule F income. Post-TCJA farmers are now required to report any traded-in farm equipment as a sale. This results in a large amount of gain being reported on Form 4797 (not subject to SE tax) and full 100% bonus depreciation on the new farm equipment reducing Schedule F income and in most cases to a loss. The net income actually reported by the farmer is exactly the same, but under current law 1,000s of farmers will have no Schedule F income but large amounts of Form 4797 gains. In this situation, the SBA should allow the farmer to reconcile the Schedule F to include all equipment gains. It likely should exclude gains on farm land and buildings.
- Many farmers participate in multiple entities. Many of these entities are profitable. The guidance indicates that each entity may file for a PPP loan. Does this mean the farmer’s compensation from each entity is allowed even if her net earnings exceeds $100,000 in total? For example, suppose Mary has guaranteed payments from 5 different partnerships. Does this allow for $104,165 of PPP loans or it is limited to $20,883 split among the five partnerships?
- Several farmers also have multiple single member LLCs. One might have the trucking operation, one has the farm and one has a produce stand. These are separate legal entities. Previous guidance indicated a holding company could file for entities under its ownership or each entity could file for a loan. The farmer in this case is the holding entity so it appears he could file for one loan or could file three separate loans. But what happens if one LLC shows over $100,000 of profits and the other two each have substantial losses? Can they file only for the profitable one?
As we write this blog post it appears the SBA has run out of funds for the PPP. However, we know that Congress will likely fund at least another $150 billion to provide additional relief. It would be nice if Congress can answer these questions since it appears the SBA is unable to.
We will keep you posted.
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.
Why should 4797 gains be included? It is not self employment income. The idea is to get payroll protection on your self employment income, that is income where self employment social security tax was paid.