Congress Authorizes More Funds for PPP and EIDL and Says Farms Can Apply - Ag Only Window Opens May 4
Note: On May 4, SBA began accepting applications for EIDL advances from agricultural businesses only.
Note: Late April 24, Treasury provided updated loan calculation instructions for different business types, including Schedule F farmers, partnerships, S Corporations, and LLCs.
It’s official. The President signed H.R. 266, the Paycheck Protection Program and Health Care Enhancement Act, into law today (April 24, 2020). This law provides another opportunity for some small businesses, including agricultural producers, to get in line for a potential loan to help them through the next few months.
Agricultural Producers Are Eligible, but Borrowers Must Act Fast
This Act allocates an additional $310 billion to the Paycheck Protection Program (the program was launched with $350 billion), setting aside $60 billion for loans made by smaller lenders, including Community Development Financial Institutions. The SBA and Treasury have announced that the PPP will reopen for approved lenders to submit applications at 10:30 am (ET) on Monday, April 27. The Act also removed a restriction that had prevented “agricultural enterprises” from applying for Economic Injury Disaster Loans (EIDL), including an emergency advance, and allocates an additional $10 billion for these emergency grants (the program was launched with $10 billion). The Act adds $50 billion to the general EIDL loan fund.
Although this is good news for agriculture, some hurdles remain. First, it is expected that the funds for both programs will be spent very quickly. Therefore, farmers need to work with their approved lenders to get PPP applications submitted as quickly as possible. As noted above, lenders may begin submitting PPP applications to SBA at 10:30 am (ET) on Monday, April 27. It has not been announced when SBA will begin accepting new EIDL applications. The SBA website says that it will first process applications that were in the queue when the funds lapsed before reopening the portal. Once the portal reopens, applications for EIDL loans will be submitted directly through the SBA website.
Paycheck Protection Program
Although PPP was intended to benefit agricultural producers from the beginning, only today did we receive any SBA guidance specific to agricultural producers. FAQs 32 – 35 in the new guidance address issues relevant to agricultural producers. Question 32 clarifies that a housing allowance can count toward payroll costs (capped at $100,000 total compensation per employee). Question 33 directs borrowers to 26 CFR § 1.121-1(b)(2) to determine whether an employee’s principal place of residence is in the United States. Question 34 specifically states that agricultural producers, farmers, and ranchers are eligible for PPP loans if they have 500 or fewer employees (and some are eligible if they have more). And question 35 affirms that small agricultural cooperatives are eligible.
Late April 24, Treasury for the first time provided specific directions for processing loans for farmers, who report their self-employment income on a Schedule F instead of a Schedule C. (See question 3). Farmers are to calculate their income based upon line 34 of Schedule F and submit Form 1040, Schedule 1 and Schedule F with their application. Many lenders had already followed this method, but in the absence of official guidance, others were hesitant.This lack of guidance for farmers also fueled concern among some that a PPP loan would prevent farmers from receiving future payments under the Coronavirus Food Assistance Program, although there is nothing in the CARES Act that would cause that result. Although we do not have guidance for the forthcoming USDA program, USDA officials have confirmed that receiving a PPP or EIDL loan will not impact a farmer’s eligibility for payments. Note that it is possible (given recent Treasury guidance denying related deductions) that a forgiven PPP loan could inrease AGI.
Even with those hurdles cleared, many self-employed farmers without employees are currently ineligible for a PPP loan because their 2019 Schedule F showed a loss. Current guidance allows lenders to look only at 2019 net self-employment income. If there is none, the farmer is ineligible. Many farmers have little or no Schedule F income, even though they were wholly dependent upon their farming operation to make a living. Because of a change in the law in 2018, income from the trading of equipment is reported on Form 4797, while corresponding depreciation or Section 179 deductions are reported on Schedule F. This has driven down Schedule F income, even though it has not reduced taxable income. Other producers, faced with difficult trade conditions and low commodity prices in 2019, simply did not make money and will have no Schedule F profit.
Despite these obstacles, the PPP may be a great help to some farmers. Those who have positive 2019 Schedule F income or have employees should, if they haven’t already, work with their lenders immediately to determine their eligibility. We have posted more detailed information on PPP loans here:
Paycheck Protection Program Offers Forgivable Loans for Eligible Small Businesses (updated April 5, 2020)
Emergency Economic Injury Disaster Loans
The CARES Act modified the traditional SBA 7(b)(2) loan program for economic injury disaster loans (EIDL) to offer more favorable terms in the wake of COVID-19. It did not, however, remove a preexisting restriction in the law applying to “agricultural enterprises.” Today’s legislation removes this exception, allowing farmers and ranchers with 500 or fewer employees to apply for EIDL Loans. Eligible businesses now include:
- A business with no more than 500 employees, including agricultural enterprises
- Individual who operates under a sole proprietorship or as an independent contractor
- Cooperatives with no more than 500 employees
- Includes small agricultural cooperatives
- Employee stock ownership plan (ESOP) with no more than 500 employees
- A tribal small business concern with no more than 500 employees
- A business, including a business with more than 500 employees, that is deemed a small business under the SBA Size Standards
- A private non-profit organization that is granted tax exemption under 501(c), (d) or (e) of the Internal Revenue Code
To be eligible for an EIDL, the business must have been in operation on January 31, 2020. There is, however, no requirement that the applicant be in business for the one-year period prior to the loan or that the borrower is unable to obtain a loan from another source. In general, an EIDL loan is obtained directly through the SBA. The CARES Act authorizes the SBA to approve an application based solely upon a credit score, without a tax return or tax transcript. The terms of the COVID-19 EIDL loans are as follows:
- Loans up to $2,000,000 (based upon economic injury suffered)
- Interest rate = 3.75% for a small business and 2.75% for a non-profit
- Maximum term is 30 years
- SBA determines repayment period and monthly payments based upon the applicant’s financial condition
- EIDL loans are not forgiven (except for an emergency advance explained below)
- Loans with a principal balance greater than $25,000 must be secured by collateral
- The CARES Act waives a personal guaranty when the EIDL loan is less than $200,000
- Loan payments are deferred for 12 months
- No application fee
The CARES Act provides that during the period between January 31, 2020, and December 31, 2020, an eligible business may request an emergency advance on the EIDL loan, in an amount not to exceed $10,000. The advance was supposed to have been received within three days of the application. The SBA is to verify eligibility for the advance by accepting a self-certification from the applicant under penalty of perjury.
An applicant will not be required to repay the advance, even if subsequently denied an EIDL loan under section 7(b)(2).
Note: To maximize funds available, SBA has restricted advances to $1,000 per employee. The advance has also not been paid within a three-day period.
The advance may be used for any allowable purpose for a loan made under a section 7(b)(2) EIDL loan, including:
- providing paid sick leave to employees unable to work due to the direct effect of the COVID–19;
- maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- making rent or mortgage payments; and
- repaying obligations that cannot be met due to revenue losses.
EIDL loans may not be used for:
- Dividends and bonuses
- Disbursements to owners, unless for performance of services
- Repayment of stockholder/principal loans (with exceptions)
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
- Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company
- Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations
Applying for the Loan
Eligible businesses can apply for EIDL loans on the SBA site once the new funds have been made available: https://www.sba.gov/disaster-assistance/coronavirus-covid-19
Interaction Between Paycheck Protection Program Loans and EIDL
Current guidance states that if a borrower received an SBA EIDL loan from January 31, 2020 through April 3, 2020, the borrower can apply for a PPP loan. If the EIDL loan was not used for payroll costs, it does not affect eligibility for a PPP loan. If the EIDL loan was used for payroll costs, the PPP loan must be used to refinance the EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan. The guidance does not provide specific instructions as to what happens if a borrower obtains an EIDL and a PPP loan after April 3. It is clear that the loan proceeds may not be used for the same purpose. We are hoping for additional guidance on this issue.
We will provide updates if additional guidance issues. In the meantime, those interested in these loan programs must act immediately to get a place in line.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.