PPP, EIDL and USDA Coronavirus Updates for Farmers
Webinar Provides Guidance on Government Funding
Out of all the industries negatively impacted by the coronavirus, agriculture continues to face a lot of unknowns. At first, agricultural producers were barred from applying for some types of government financial assistance; now, new funds geared directly toward supporting America’s farmers are on the way, but distribution channels are still hurting.
On May 15, 2020, farmers and agricultural producers tuned in for a live webinar to help them understand the two main funding sources currently available, as well as updates from the USDA on direct payments and assistance.
Paycheck Protection Program for Farmers
It’s been about five or six weeks since the CARES Act was first introduced, giving us the Paycheck Protection Program (PPP). This has really been geared toward keeping people off unemployment. It centers around payroll and full-time equivalent employees, and this loan can actually be 100 percent forgiven if the right factors are in place.
Here’s how to calculate 2.5 months of payroll expenses from Steven Peiffer.
If the PPP loan is not all forgiven, some or all of it, depending on the situation, will convert into a loan at one percent that is payable over two years. The first payment is not due until six months from the funding date. With this program, documentation is key. As much as possible, at least 75 percent of the proceeds from this loan program can be spent on payroll.
PPP Loans for Farmers
Make sure the full-time equivalent employee count is maintained. She then discussed how most farmers may not have actual employees; instead, they file a Schedule F as a sole proprietor farmer.
The loan amount for farmers is based on the prior year net Schedule F income. Based on guidance that was released mid-way through the PPP loan funding period, farmers are eligible to receive up to 2.5 months of income, based on the prior year’s Schedule F. Partnerships can also apply and are eligible for additional funding based on guidance that was just released last week. Partnerships that already applied and were approved for PPP funds can now request more funds in a second application, if needed. Any amount that is requested is based on the self-employment income that is passed through to the partner on their K-1.
Calculating PPP Loan Forgiveness for Farmers
Some items involved in calculating that payroll cost are gross payroll, with the addition of a few other things; most payroll taxes are not included. These requirements and loan forgiveness strategies were discussed in an earlier webinar.
A few special situations that apply to agriculture are commodity wages from the prior year, H-2A workers, and allowable expenses.
We don’t believe that commodity wages will be allowed as part of the forgiveness piece in the wage calculation. Therefore, farmers should pay themselves a cash wage during the eight-week PPP loan forgiveness period.
Another special situation for farmers is H-2A workers. Initially, the SBA said that their payroll would not be allowed as part of the PPP loan; however, that has changed. And farmers can now apply for the PPP loan based on some of their H-2A wages if those employees were in the U.S. for more than half a year. If that’s the case, try applying for PPP loan funds again, even if the first time the application was denied.
There is still a lot of information that is unknown about how farmers should allocate for PPP loan funds. For example, whether to use the cash or accrual method of accounting for documenting expenses. This would factor into how expenses are paid: either writing checks as the expenses come or pre-paying some expenses, like rent. The deductibility of certain expenses is up in the air, too.
Another question that’s out there for farmers concerns utilities. For sole proprietors, gas is an allowed utility expense, but the wording is very specific. Fuel isn’t mentioned, so diesel may not be allowed as a forgivable expense. We’re still waiting on guidance with that.
Finally, farmers should be talking to their CPA and banker for additional guidance specific to their situation to make sure that everything is being done to maximize the amount of loan forgiveness. The amount of the PPP loan is based on 2.5 months of prior year income; however, the forgivable piece is only valid for eight weeks after disbursement. Only 25 percent can be used on non-payroll expenses, like utilities and mortgage interest.
Once farmers hit that 75 percent threshold for payroll expenses, the remaining 25 percent of PPP loan proceeds can be spent on payroll, or on mortgage interest, rent, or utilities. Please note: At the time of this webinar, guidance on these calculations was still unclear. Later in the afternoon, though, the SBA released the Paycheck Protection Loan Forgiveness Application.
What we are doing is keeping an eye on the SBA and the IRS as this process moves forward. However, your lending institution should be considered the gatekeeper for this information, since PPP loans are applied for, approved, and disbursed through your local bank. Their role is to submit loan forgiveness applications to the SBA, so they will guide what documentation they require. That means that each lending institution may require different documentation.
Economic Injury Disaster Loans (EIDLs) for Farmers
Unlike PPP, an Economic Injury Disaster Loan (EIDL) is a traditional loan. It is 30 years at 3.75 percent interest and is supposed to be used for operating expenses. Its history with coronavirus has been plagued with discrepancies.
Five or six weeks ago, applicants could go online, click a few buttons, and get a $10,000 advance within a few days if the application was approved. About a month went by, and no one got any cash. Then, the SBA released new guidance saying that the $10,000 cash advance would be based on the number of employees. Under this new calculation, applicants would receive $1,000 per employee, up to $10,000.
During the early days of EIDL funding applications, agricultural producers were ineligible to apply.
Five or six days ago, the SBA quietly lowered the maximum loan amount from $2 million down to $150,000. The biggest positive is that loans are finally starting to move out and into the hands of businesses that really need them. And now, agricultural producers are the only business entities that can apply for EIDL funds, since money has been exhausted for other types of small businesses.
EIDL Application Document: Surprises
Initially, it was thought that EIDL applications would not require personal guarantees, like collateral. Now we’re starting to see the actual loan document has some interesting items. For example, the SBA is potentially going to take a blanket UCC over all assets.
There are also requirements for transferring what you can do with that collateral and limits on distributions.
Adams Brown spoke with the SBA about these questions. The SBA representative agreed that these restrictions are not the intent of the CARES Act, but applicants are still required to check all the boxes and agree to the terms to submit the application.
EIDL Cash Advances for Farmers: Considerations
Farmers that only applied for EIDL funds may have been eligible for a $10,000 advance, as well as a $150,000 loan. By itself, the advance is a grant that would not need to be repaid. What about the rest of the money?
Farmers and other PPP applicants can take up to 30 days to decide if they want to accept loan funds. So, go ahead and apply for EIDL funds. In that timeframe, evaluate the finances until more clarification comes along. In the meantime, set the EIDL funds aside in a separate checking account. Talk to your banker in the meantime.
Evaluate your equipment strategy – how EIDL funds would be used, what is allowable, and so forth – and find out if your banker has a UCC on loan proceeds. Do the due diligence, in other words. Know what to expect.
The Coronavirus Food Assistance Program (CFAP) was included in the last round of the CARES Act. It was funded with $19 billion. Of that amount, $16 billion was designated for direct payments to dairy, beef, and grain farmers to assist producers with additional adjustment and marketing costs resulting from lost demand and short-term oversupply.
The following amounts were also designated from the CFAP:
- $125,000 limit per commodity; $250,000 gross limit per farmer
- $3.9 billion for row crops
- $9.6 billion for livestock
- $2.1 billion for specialty crops
- $500 million for other crops
We’re still waiting on guidance on how and when these funds will be distributed. These limits do not affect other program payments. Don’t confuse this money with other government payments farmers are receiving.
Regarding the $9.6 billion CFAP allocation for livestock, the USDA has said that any commodity in this category that has seen at least a five percent decline in value from January is eligible. Eligible commodity losses that occurred between January 1 and April 15, 2020, can be potentially reimbursed up to 85 percent. Anything beyond that, for the following two quarters, is reimbursed at 30 percent of the loss.
Other USDA Assistance for Farmers
The USDA has also indicated they intend to spend $100 million a month each on fruits and vegetables, dairy products, and meat and distribute the food to food banks across the country, as well as some community and faith-based organizations to help during this time.
A large amount of additional assistance has been pushed out to packing plants, many of which are still closed across the country. Delivery of beef is tough right now. The market is just not there even as prices in grocery stores continue to go up. Those increased prices aren’t being passed down to the farmer. So, one of the avenues that Congress is trying to focus on here is keeping supply and demand even, and getting packing plants back open, so that prices recover.
What Should Farmers Do Now?
Congress knows this is a short-term fix, not a long-term solution for farmers. If the pandemic continues and distribution channels continue to suffer, it will still be a long road, he said. There are already additional bills before Congress and potentially additional assistance for farmers, in addition to the direct assistance already underway.
The next step for farmers is to visit their local FSA office and make sure they’re signed up for the program. Farmers will need to register their acres. FSA offices are taking appointments by phone.
Catch up on our previous blog post about COVID-19 relief for farmers.
With how fast the COVID-19 environment is moving, farmers need to be ready to capitalize on opportunities and act quickly. Keep ongoing conversations with lenders and CPAs during this time. Adams Brown is here to help answer questions and decide on the best course of action. Talk to your Adams Brown representative and be sure to visit our Coronavirus Resource Center for updated information.