About This Episode
Recorded April 15, 2020, Chris Barron and CPA Paul Neiffer sort through Paycheck Protection Program guidance as it lands. The cleanest applications, Nieffer says, are single-entity operations, a C-corp or S-corp running all the payroll with no self-employed income mixed in. Multi-entity structures where one entity makes payroll and another reimburses have confused lenders, and some banks were still telling farmers they did not qualify, which the USDA site directly contradicts.
New guidance settled the partnership question: the partnership applies, not each partner, using net self-employment income from the K-1 including line 1 income or loss, not just guaranteed payments. Contract laborers get a loan on net income, so $100,000 billed against $50,000 of costs supports roughly a $10,000 loan, and the farmers paying that contract labor cannot count it. H-2A and H-2B workers do not qualify, and earnings above $100,000 per person are excluded.
Nieffer's practical verdict: a Schedule F farmer who has driven taxable income to near zero with bonus depreciation gets little or nothing, and amending a return to qualify costs more in tax than the loan is worth. Operations with $200,000 to $300,000 in labor can expect $20,000 to $40,000. He also knocks down the rumor that taking PPP blocks USDA program payments, and previews where the $9.5 billion for livestock and specialty crops is headed.
“Don't try to get too creative because you're going to get caught on that.”
— Paul Neiffer
Key Takeaways
Partners do not apply individually. The partnership files one application using net self-employment income off the K-1, which folds in line 1 income or loss rather than just guaranteed payments.
Contract labor is scored on net income, so $100,000 of billings against $50,000 of costs yields about a $10,000 loan, and the farms writing those checks cannot include the payments in their own calculation.
H-2A and H-2B workers do not qualify, temporary workers who will return home do not qualify, and compensation above $100,000 per employee is excluded.
A farm with $200,000 to $300,000 of payroll should expect roughly a $20,000 to $40,000 loan; a Schedule F farmer with near-zero taxable income gets essentially nothing on the self-employment side.
Amending a return or electing out of bonus depreciation to inflate qualifying income costs more in tax than the loan pays, and the SBA can verify what was actually filed with the IRS.
Nothing in the law blocks PPP participants from USDA programs; Nieffer expects the second tranche and possibly a move from 2.5 to 3 months of payroll.
Full Transcript
Chris: Welcome everybody to another episode of the Ag View Pitch, and today we're gonna have another update on the PPP program, the Paycheck Protection Program, and have a conversation with Paul Knepper. How's it going, Paul?
Paul
Nieffer: Doing pretty good. I think we got about as cold as you did a couple days ago. I think I was talking to somebody, they were at 17, but our house was about 24, but today's a little nicer.
Chris: Yeah, wow. Yeah, I know there's some soybeans in the ground in places and not really very much corn, but I think we were 22 or 23 degrees and that's getting down there. But it sounds like the weather's gonna start warming up. We'll definitely take it.
Paul
Nieffer: Well, and as long as the seed's in the ground and hasn't come up out of the ground, it'll just— it'll stay dormant. So I think you're probably still okay. It's when it gets up and starts growing that that's when you really got to watch out for it.
Chris: Yep, that's right, that's right. So, well, speaking of dormancy, I guess, let's— we've had a lot of stalled farmers here that have been kind of asking a lot of questions on this Paycheck Protection Plan and what it means and where it works and where it doesn't work. Could you start out a little bit on where it's worked best? And kind of what is working, and then we can kind of get into some of the questions.
Paul
Nieffer: Yeah, I think the easiest ones that farmers qualified for is where they weren't self-employed, because again, they had to wait that extra week in order to qualify for the self-employed. Plus, we just finally got some guidance on self-employed yesterday. But where I've seen it really work fairly well is that you have a fairly straightforward business-type operation. Maybe you're a C-Corp or an S-Corp. You just got one entity. You have all the payroll through that one entity, and you don't have any self-employed in amongst all those entities. That's worked really well. As you start adding entities, and especially let's say you got one entity that makes the payroll, and you got another entity that pays, reimburses for the payroll, we've noticed that some of the banks don't quite understand that.
Another thing, especially in the ag area, for several weeks, even— well, I guess I shouldn't say several weeks. The plan's only been out for a couple weeks now. But we still have some areas of the country where certain banks have been pushing back and saying farms don't qualify because they're sort of used to the old SBA rules. I think most of the operations out there, most of the banks out there understand now that ag does qualify. And I would certainly say if you have anybody online that the bank has told them they don't qualify, go to the USDA website. There's a coronavirus frequently asked questions, and right under Paycheck Protection Program, there's a sort of a Q&A. The first thing they say, farms qualify. So I think most of the banks are starting to understand that.
Chris: Okay, so that's, that's good to know. Great sites to go to get some information. What about sole proprietors And, you know, an individual farmer out there with a Schedule F.
Paul
Nieffer: Yeah, and we're still— yeah, we got guidance yesterday, but it was really focused on what I call more the sole proprietor employee, you know, the person that drives an Uber. They're an independent contractor. They file a Schedule C. That guidance yesterday was really focused on that type of sole proprietor. I think for the true farm operation that's got a lot of expenses and so on, We're still waiting on some guidance on that. But what we did find out, let's say that you're a partner in a partnership, you individually do not apply for the loan. The partnership will apply for the loan. They're going to look at what is your net self-employment income on that partnership K-1 that you get. And it's not going to be just your guaranteed payment. It's also going to incorporate whether line 1 has an income or whether it has a loss.
You're going to have to incorporate that into the equation. So, so that was definitely some good guidance. It gives us clarity that the individual farmer in that situation where they're just strictly a partner in a farm partnership, they don't file. The partnership files for everybody. So that's going to make it easier. Instead of filing 5 or 6 applications, you only have to do one. So that, that was good news.
Chris: Okay, um, appreciate that. Another kind of somewhat confusing question, and maybe you can help me with this one. We talked a little bit offline, but If you're a contract laborer, okay, and you're doing work for some multiple places, you know, 2 or 3 different places, and your income is contract labor, how does that apply?
Paul
Nieffer: How do you— so you're going to get a loan based on the net income that you receive off of that contract labor. So you say, like you say, let's say you have 4 farmers that pay you $100,000, but you have $50,000 of costs. Your net income that you're going to report is $50,000, you're going to get a loan based on $50,000, which is approximately a $10,000 loan. That's, that's all it's going to be. Now, the farmers that are making those payments, they're not allowed to include any of those payments in their calculation of net farm income that would apply for the loan. So they're going to have to back that out. Essentially, for a self-employed farmer, you're strictly going to look at the bottom line. So whatever your bottom line that shows up on Schedule F, which for a lot of farmers is negative, If you're negative, you get no loan based on your self-employment income.
So that's something to be aware of. It's going to be tricky. You know, a lot of farmers have done a very good job of showing little or no taxable income because of bonus depreciation and other items. And so that could hurt them as far as being eligible for any loan based on their earnings. Now, some people have asked me, well, can I go back and amend my tax return, maybe increase my taxable income so I qualify for more of a loan? I've already done a calculation. I did a blog post last night that I posted. Your actual tax liability is going to outweigh whatever you're going to get in a loan. So why do you want to spend maybe $15,000 or $20,000 to get a loan for $10,000? You know, because you're going to have to spend the money on the taxes. Other people said, well, you know, because right now you're not required to actually have filed your 2019 return.
You can actually give them a Schedule F and base it off of that. And they're saying, well, I'll give them a Schedule F and I won't take any Section 179 and I'll elect out a bonus and then later on I'll go ahead and file a return that shows, you know, that I'm back down close to zero. Likely that's not going to work. The SBA or the bank is going to require you to sign off on a form that allows them to go to the IRS and find out what you actually put on your tax return. Don't try to get too creative because you're going to get caught on that.
Chris: Right. So basically what you're saying in a nutshell is a Schedule F farmer that has done a good job with tax management trying to qualify for this loan is really probably not that— it's not worth your time to try to—
Paul
Nieffer: The only ones I would say, the only ones that really are still going to qualify for a decent amount are those that have a fair number of employees. You know, if you got $200,000 or $300,000 of labor that you're paying out, you're going to qualify for a, you know, $20,000 to $40,000 loan. But yes, if you've done a good job at tax management and you've dropped your taxable income down to a fairly low number, you're not going to qualify. You still might go for the loan, but, you know, for $3,000 or $4,000, is it worth all the effort of doing it? Then you've got to calculate how much is forgiven. It appears that based on the guidance yesterday, you're automatically going to have about 20% of it not forgiven. So you're still going to owe, you know, 20% of it at 1% interest due in 2 years. So is it worth all the hassle? I'm just not sure.
Chris: Mm-hmm. Okay. So, you know, your comment on the employees being kind of something that would dictate that a little bit, we've had some questions and I know I've I've thrown these to you and kind of know the answer, but I want to have you touch on what employees qualify and what employees don't qualify. So like H-2A, right? You know, what about some of the, the dairies or some of the operations with quite a few employees that are, you know, they have to be a US citizen, is that correct?
Paul
Nieffer: They, they do not have to be necessarily US citizen because you have people that are here permanently and their home is here in the US. They don't have a home back overseas, but those that are here temporarily, even on a green card, they're here temporarily and they're going to go back to home at some point, those employees don't qualify. The H-2A and the H-2B employees do not qualify. Any earnings over $100,000 is not included. Now, you still get the earnings up to $100,000, but you just don't get anything over that. The other thing, back to the self-employed farmer, There were some questions. Do we get to include health insurance that that farmer pays? Excuse me, retirement payments. Those are not included. So the only thing you qualify for is your bottom line net farm income on Schedule F or net business income on Schedule C, according to the guidance yesterday.
Chris: What about on the payroll side of it for those who have that being part of their compensation as payroll?
Paul
Nieffer: Well, you know, the farm operation— I guess I'm not sure on the question, Chris. The farm operation, if they pay employees, they're going to get to count the pay for the employees, any health insurance they pay, and then any type of retirement plan payments that they make for those employees. They'll be able to count that. If you're an independent contractor, you're contract labor, You know, you're going to have your own calculation over on your side.
Chris: Sure. Okay. Gotcha. Any— is there anything that I haven't asked or any questions that you're getting that you think are things that people need to be aware of that?
Paul
Nieffer: Yeah, I think the one thing we keep hearing, the rumors— I've gotten multiple emails in the last few days on this— the some rumors out there that if you participate in the PPP loan program that you can't, cannot participate in the USDA programs, whatever those might be. There's nothing in the law that prohibits you from participating in both. USDA has not come out, matter of fact, on their website, they specifically state farmers, to some degree, farmers should apply for the PPP because they're saying you qualify. So, if they were to come out now and say that you don't qualify for USDA programs because you were in the PPP, That would not go over very well. I just don't see that happening. So that's something that we know there's rumors to that effect, but I don't think that's going to happen.
Chris: You'd have tractors driving to Washington, D.C., probably.
Paul
Nieffer: Yes, yes, you definitely would. Or down to Georgia. They'd go down to talk to Sonny.
Chris: Yeah, exactly. So that's interesting. You know, one thing that I heard— and I didn't mention this to you offline, but I'm going to bring it up— we heard this morning from a lender actually, and a pretty reliable source, that they thought in the next 24 hours—and we're here talking on the 15th of April—that within 24 hours that first bucket of funds for this particular program, they thought would be out of money. Have you heard that? And is that something—
Paul
Nieffer: Yeah, no, we continue to hear either Friday or early next week the first tranche will probably run out. We already know there's going to be a second tranche. So I wouldn't be, you know, especially if you're a farm operation and you really haven't been, let's say, immediately impacted by COVID, you know, you're in the middle of spring planning, you know, you got your labor people there, you're able to, you know, either have your own funds or you've been able to borrow money to cover the cost. The next round will be there. Actually, we hear that you're going to be able to borrow up to 3 times 3 months of payroll instead of 2.5 months. So I'm, I'm not, I'm not too worried about you running out of money on the first round.
Chris: So if you can borrow more on the second round, are there going to be people that borrowed on the first round saying, hey, I want that other month?
Paul
Nieffer: Yeah, well, it's half a month. They can say that, but I don't think they're going to get it.
Chris: Okay, so, so they're going to be fine if they haven't done it yet?
Paul
Nieffer: Yeah, yeah, no, I, yeah, and like I say, if you're talking a $5,000 or $10,000 or $15,000 loan, yeah, it'll get forgiven, but not all of it will get forgiven if you're the Schedule F farmer. Are you going to lose too much sleep over it? Yeah, it would be nice to get it, but, you know, I don't think it's going to make or break your farm operation.
Chris: Right. On the CCC side of things, you know, there's there's funding there. And as you said, you know, those are kind of two separate things. And not, not to put you on the spot or throw anything out there, but, you know, what's, what's your thought on there? I mean, it looks to me like the, the dairy, the cattle, the hogs, those operations are definitely being impacted the most.
Paul
Nieffer: Have you heard anything yet on— Yeah, yeah, you know, the NCBA came out, I think, with an announcement either yesterday or today, this morning, that they're expecting livestock to lose about $19 billion this year because of COVID I think the hogs are talking in that $5-6 billion range. Dairy's probably, you know, maybe not that high but could be that high. Certainly, I don't know if the $6 billion of CCC will go directly toward those. I think the $9.5 billion that was allocated for livestock, you know, that's going to go to cattle the hogs, maybe the dairy, and then the specialty crops. You know, the farmers down in Arizona and California and Florida that picked a crop, well, they can't pick the crop because there's no customers. The restaurants are closed down, you know, so the crop's just going to get plowed under. So that's where that money is going to go towards.
The $6 billion, not hearing, you know, Sonny keeps saying, or the Secretary keeps saying, You know, the corn and soybean farmers will probably get their money when the CCC gets replenished in July. I think he's still concerned that it's going to create planting distortions. You know, if they hear a corn guy will get this dollar amount and the bean guy will get this dollar amount and the wheat guy will get this dollar amount, you know, they're going to switch crops. So I definitely think it's going to be maybe like MF2 last year where it's just a flat per acre.
And again, I think I said on the last podcast that we had, if you got a good-sized payment last year, a good-sized payment 2 years ago as a corn or soybean farmer, you may not get as much this year because a lot of that money is going to go toward, at least right now, the perception of other parts of ag that have been hurt worse than corn and soybeans on a percentage basis. So, and we also heard, you know, at least I'm hearing that supposedly there will be an announcement from USDA likely by tonight. So, you know, we'll be able to parse those details when they come out. Yeah.
Chris: And wouldn't some of that be related a little bit to ethanol too, though? I mean, on the corn specifically, the corn side, maybe not soybeans obviously as much, but you know, that, that has an impact all the way around livestock and crops.
Paul
Nieffer: Yeah. Yeah. You know, You know, certainly ethanol, we already know that there's plants shutting down. We know that the oil is down, what, 30 or 40% based on demand, which definitely affects the ethanol plants. Now those, you know, oil is a little bit tougher to turn off the oil well spigot, you know, and certainly I know ethanol doesn't want to turn theirs off, but I think they can probably mothball a plant easier than a than an oil well can. But, you know, we're going to end up having what, maybe there's 5 billion bushels approximately used for ethanol. If we cut demand by 30%, that's 1.5 billion bushels. But then part of that goes out the rear end in the form of DDGs. Yeah, we're talking probably 1 billion bushels of demand that's disappeared for the corn farmer.
Chris: Yeah, that's going to be interesting to see how that's all materially looked at from the ethanol industry standalone and how that relates back to the farm gate for sure.
Paul
Nieffer: Yeah, but we also— and you know, this isn't necessarily an ethanol call, but we also have to understand, I think going forward, unless we get some type of E15 mandate, the ethanol peak demand was about 4 years ago, 3 years ago. You know, it's gonna— you know, we're gonna have more and more Teslas and We're going to have lots of cars that no longer are going to run on gasoline and don't need ethanol. And so that demand curve, we've hit peak demand for sure. Right, right. Well, Paul, appreciate everything.
Chris: Again, any last comments or anything around this? And again, I think this is obviously still going to kind of be a moving target. I'm sure we'll hook up one more time or a couple more times here yet as things develop.