One of the most popular support programs developed through the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act was the Paycheck Protection Program (PPP). This program was administered by the U.S. Small Business Administration (SBA) through participating lenders throughout the U.S.
This program was originated to grant relief through a forgivable loan to employers to assist with continuing to pay their employees while in lockdown during the declared pandemic period. It was also expanded to self-employed individuals, independent contractors and sole proprietors to aid in paying for such ongoing expenses as rent, utilities, interest on debt obligations and supplier costs.
In brief, the program loan was calculated based on average total monthly payments for payroll costs incurred for the one-year period prior to the date a loan is made, or for seasonal employers, the average of any 12-week period between Feb. 15, 2019, and Feb. 15, 2020, multiplied by 2.5.
For self-employed individuals, independent contractors and sole proprietors, the amount of the loan was determined in much the same way: by the net income reported on the applicant’s tax return divided by 12 months and multiplied by 2.5.
Unlike most small businesses prior to Covid, the farming and ranching community was already dealing with financial challenges. Farmers who had expanded their operations and/or experienced operating losses incurred more debt and were already in financial distress. This was largely due to the downturn in commodity markets since 2014, which we have witnessed based on the increased number of chapter 12 filings throughout the agricultural community. Thus, most small family farm operations were already indicating net losses on their tax returns.
To further exacerbate this issue is the § 179 accelerated depreciation allowance provided to farmers to assist with their investments in high-cost equipment. This depreciation allowance is carried forward to Schedule F of their tax returns and inordinately decreases the realized net income of the operation. Unfortunately, the smaller family farmers who operate and work their own farms and indicate a loss on their IRS Form 1040, Schedule F, resulting from the scenario described above did not qualify for PPP.
Another problem that soon became an issue for farmer/rancher eligibility for the PPP loans are the various ways that farmers are organized to do business. Many family farmers operate under closely held limited liability corporations and partnerships, in addition to sole proprietorships. There are other legal and program reasons for farmers working under such entity formations, yet the CARES Act did not address the eligibility criteria for farmers working under them. Thus, the original PPP program eligibility and calculation procedures for farmers and ranchers were unintentionally unfair and restrictive, creating a disparity.
In response to these conundrums, congressional members introduced H.R. 1246 on Feb. 23, 2021 — the “Paycheck Protection Clarification for Producer’s Act” — and two corresponding bills: S. 1047 and H.R. 1411, each named the “PPP Flexibility for Farmers and Ranchers Act.” The last two bills were introduced on Feb. 26, 2021, and March 25, 2021, respectively. All three bills were introduced in an attempt to address the disparity regarding farm operators. H.R. 1246 attempted to resolve the problem by striking subclause “I” to remove any description of eligibility regarding business name and referred to only those applicants utilizing a Schedule F for tax purposes. The latter two bills kept subclause “I” and added “partnerships” to the list of those eligible. None of these bills, however, have yet made it through committee review, nor have they been further acted upon at the time of this writing.
Finally, the SBA, through its Interim Final Rule process, further clarified and addressed questions regarding the eligibility of farmers’ and ranchers’ business entities, as well as corrected the disparity of loan calculations. In a March 12, 2021, update to the public’s questions regarding the above issues, the SBA reported they would adopt single-member LLCs and joint ventures of husband-and-wife operations as eligible PPP applicants, as long as only one member files the application on behalf of the joint venture. The Schedule F would be the determining document as far as in calculating the total amount of loan funds to be awarded. Those organized under a “partnership” name, however, would still be calculated as before by utilizing a K-1 plus any other employee payroll and expenses reported in the previous tax year.
Regarding the amount of loan eligibility, the SBA amended its rules to utilize the stated gross income as reported on line 9 of Schedule F, divided by 12 months to obtain the average, then multiplied times 12. The gross revenue reported would be capped, however, at $100,000 for the purpose of calculating the amount of loan a farmer would be eligible for. Thus, the maximum PPP loan made under this calculation would be $20,833, then, based on limiting the applicant to $100,000 of declared income during the previous 12-month period. Any PPP loan received under previous guidelines would be subtracted. For those operators who submit both a Schedule C and Schedule F with their tax returns, the cumulative of the net income from Schedule C and the gross income from Schedule F will be added together. In this case, the $100,000 maximum limit still applies to the total. Finally, farmers who hire seasonal or full-time employees may add those expenses as part of the total loan award and would not be required to subtract that from the gross income on line 9.
The deadline for applying for the PPP loan program was May 31, 2021. Depending on future events, this program might or might not be activated again. If it is, it is anticipated that additional rules will be implemented to further clarify those that were previously in question.