How Will COVID-19 Relief Impact Farmers' 2021 Returns?
Like 2020 before it, 2021 was no ordinary year. As we leave the year behind, we review key tax considerations arising from 2021’s unique circumstances and look ahead to the 2022 tax filing season. This post reviews the tax treatment of common COVID-19 benefits distributed in 2021. With high crop yields and robust commodity prices, many farmers closed 2021 with more income than they expected. Likewise, input costs for 2022 are on track to reach record highs. For more information on tax strategies in light of these trends, read this separate post.
During the past 21 months, Congress responded to the COVID-19 pandemic by allocating trillions of dollars to programs designed to assist families and businesses. Specific COVID-19 legislation included the following:
- Families First Coronavirus Response Act (FFCRA) (March 2020) - $225 billion
- CARES Act (March 2020) - $2.2 trillion
- PPP Enhancement Act (April 2020) - $483 billion
- Consolidated Appropriations Act, 2021 (CAA) (December 2020) - $920 billion
- American Rescue Plan Act (ARPA) (March 2021) - $1.9 trillion
While the FFCRA, the CARES Act, and the PPP Enhancement Act distributed benefits in 2020, the CAA and ARPA authorized new benefits for 2021. Following is a summary of COVID-19 payments or tax credits that may affect farmers’ 2021 income tax returns.
Economic Impact Payments / Recovery Rebate Credits
Modeled after two rounds of economic impact payments reported on 2020 returns, ARPA authorized “2021 rebate” payments to eligible individuals, in the amount of $1,400 per person ($2,800 in the case of a joint return), plus $1,400 per dependent. “Dependents” for the 2021 rebate payments include any legal dependent, and not just children under the age of 17.
As with the two prior rounds of economic impact payments (also called “stimulus payments”), the payments were an advance of a refundable credit allowed to eligible individuals on their tax return, but this time for tax year 2021. As compared to the first two rounds of economic impact payments, eligibility for the 2021 recovery rebate phased out more rapidly, with ineligibility reached at a lower income level. Married individuals with $160,000 or more in modified adjusted gross income and single individuals with $80,000 or more in income were not eligible for the advance payments or the associated credits. As with the 2020 economic impact payments, individuals must reconcile the 2021 economic impact payment on the 2021 return. This recociliation, however, is taxpayer friendly. When filing the 2021 return, if individuals are entitled to a credit that is larger than the advance payment received, they may claim the additional credit on the 2021 return. However, if they received a larger advance payment than the credit to which they are entitled on the 2021 return, they are not required to pay back the difference.
IRS will send Letter 6475, Your Third Economic Impact Payment, to recipients of advance payments in January of 2022. Recipients should save this letter and provide it to their tax professional along with other 2021 tax-related documents. Individuals may also access a record of their payments if they establish a taxpayer online account at https://www.irs.gov/payments/view-your-tax-account.
Expanded / Advanced Child Tax Credit
ARPA also authorized a special monthly payment for most families with young children, from July through December of 2021. These novel payments were partial advances of the child tax credit, which Congress expanded significantly for 2021 only. Since 2018, the child tax credit has been a $2,000 offset against tax liability for each child under the age of 17. The credit phased out when a married couple reached $400,000 of income. Before 2021, taxpayers claimed the credit on their tax return. Only $1,400 of the credit was refundable, meaning that no one could receive a refund for more than $1,400 of the credit amount that exceeded tax liability. Before 2021, parents were also required to have earned income to receive the child tax credit.
For 2021 only, ARPA significantly changed the rules. First, the child tax credit is $3,000 per child, for those ages 6 through 17 (17 year olds are included in 2021 only) and $3,600 for children under 6 for taxpayers meeting certain income requirements. The entire credit is refundable, meaning that a taxpayer may receive a $3,000 refund, even if they have no income tax liability. Finally, Congress removed the earned income requirement for 2021. In other words, an individual with a qualifying child can file a return to receive the “child tax credit” in 2021, even if they had no earned income. The enhanced $3,000 credit begins to phase out where income exceeds $150,000 for those who are married filing joint and where income exceeds $75,000 for singles. The $2,000 credit continues, however, until taxpayers reach income levels of $400,000 for MFJ and $200,000 for other taxpayers. It then phases out entirely for taxpayers with income above those levels.
IRS began making advance child tax credit monthly payments July 15, with additional deposits made each month through the end of the year. The advance payments comprised a 50 percent advance on the expected 2021 child tax credit, generally calculated by IRS based upon 2020 tax return information (if that return was on file). Recipients of the advance credit will claim the balance of the credit (if any) when they file their 2021 tax return.
Unlike the economic impact payments, the advance child tax credit payments may have to be repaid when filing the 2021 tax return if an individual received more advance payments than the total child tax credit to which they are entitled on the 2021 return. This could happen, for example, if a parent is divorced and not entitled to the child tax credit in 2021 for a child for whom they received advance payments. Even so, no repayment will be required in most cases if income is below $60,000 for those who are married filing joint or $40,000 or less for singles. Full repayment of an excess advance payment will be required if income is $120,000 or more for MFJ or $80,000 or more for singles.
To help with this reconciliation, IRS will send individuals who received advance child tax credit payment Letter 6419 in January of 2022, providing the total amount of payments disbursed in 2021. Those receiving this letter must bring it to their tax professional, along with other tax-related documents.
Paycheck Protection Program
Perhaps generating more attention and questions than any other COVID-19 relief provision in early 2021, the Paycheck Protection Program or PPP provided $525 billion in 100 percent federally-guaranteed loans to small businesses, including the self-employed, in 2020. The CAA allocated an additional $284 billion to a reauthorized and revised Paycheck Protection Program in 2021. This program allowed first draw loans to those borrowers who did not receive a loan in 2020, second draw loans to borrowers who could demonstrate a 25 percent or greater reduction in gross receipts for any quarter in 2020, as compared to the same quarter in 2019, and first draw loan increases to select borrowers, most notably some self-employed farmers.
With the CAA, Congress explicitly confirmed that forgiven PPP loans are not income to the taxpayer and “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied by reason of a forgiven PPP loan’s exclusion from gross income.” In other words, the receipt of a PPP loan in 2021 (or 2020) does not affect an individual’s tax liability. Iowa, along with many other states, has conformed to this treatment. In other words, a PPP loan is not reported on the Iowa return, and tax deductions are not reduced. Although owners of pass-through entities retain the benefit of the income exclusion by receiving a basis increase when the PPP loan is forgiven, owners of entities should work with their tax professionals to insure that the reporting of a forgiven PPP loan and its associated expenses complies with IRS guidance.
IRS guidance issued in November of 2021 clarified several outstanding issues regarding the timing of the exempt income arising from the PPP loans. For example, Rev. Proc. 2021-48 provided that taxpayers may treat exempt income from forgiven PPP loans as received or accrued when (1) expenses eligible for forgiveness are paid or incurred; (2) an application for PPP loan forgiveness is filed; or (3) PPP loan forgiveness is granted. IRS Form 1040 Instructions for 2021 state:
If you have tax-exempt income resulting from theforgiveness of a PPP Loan, attach a statement to your return reporting each taxable year for which you are applying Rev. Proc. 2021-48, and which sectionof Rev. Proc. 2021-48 you are applying—either section 3.01(1), (2), or (3).
This guidance is important when calculating gross receipts for another tax provision, such as the small business exemption from the business interest deduction limitation. Although proceeds from forgiven PPP loans are exempt from taxable income, they are included in gross receipts unless other IRS guidance excludes them.
It should also be noted that newly updated Draft Form 1120-S Instructions for 2021 state, "An S corporation should include tax-exempt income from the forgiveness of PPP loans on line 3 and report expenses paid with PPP loans that are forgiven on line 5 in column (d) of the Schedule M-2." IRS has taken the position that PPP-related expenses reduce the other adjustments account (OAA), not the accumulated adjustments account (AAA).
Employee Retention Credit
Farmers with employees may benefit from a generous employee retention credit in 2021. Generally, an employer who can show a greater than 20 percent decline in gross receipts in any of the first three quarters of 2021, as compared to the same quarter in 2019, are eligible for up to a $7,000 payroll tax credit per employee for each quarter of eligibility. Farmers generally claim this credit on the Form 943, which is due January 31, 2022. Farmers with employees should ask their tax advisors about their potential eligibility for this credit, both in 2021 and potentially for 2020.
Sick and Family Leave Credits
The CAA and ARPA also extended the availability of sick and family leave credits to employers. Self-employed farmers with no employees are eligible for a tax credit if they can document that they were unable to work because of certain COVID-19-related reasons. Specifically, ARPA provides self-employed taxpayers a potential family leave credit for a maximum of 60 days, and a potential sick leave credit of 10 days for 2021. The credit is only available for absences between the dates of January 1, 2021, and September 30, 2021. Based upon average daily self-employment income, the credit is available if the self-employed person could not work because they were sick. A lower credit is available if the self-employed person could not work because they were taking care of a family member who was sick with COVID-19 or unable to attend school or daycare because of COVID-19. Credits are also available for COVID vaccinations occurring between April 1, 2021, and September 30, 2021.
Self-employed farmers will claim their family and sick leave credits on Form 7202. Those claiming the credit must maintain documentation and discuss their potential eligibility for the credits with their tax advisors.
USDA created the Coronavirus Food Assistance Program (“CFAP”), with funding from Congress, to compensate farmers for losses associated with COVID-19. The agency made two rounds of CFAP payments in 2020. Some farmers received CFAP payments in 2021.
Farmers must include CFAP payments in gross income (subject to self-employment tax) for the year in which they receive the payments. They report the payments on lines 4a and 4b of IRS Form 1040, Schedule F.
Reconsider the March 1 Deadline
Every year it seems the March 1 deadline to avoid estimated tax payment penalties is more challenging to meet. This year, qualifying farmers may choose to avoid this deadline by making only one estimated tax payment by January 18, 2022. Those who choose this option may file the return and pay the remainder of the tax due on the standard tax filing deadline, which is April 18, 2022.
Qualifying farmers making one estimated tax payment by January 18, 2022, must pay the smaller of:
- 66 ⅔% of 2021 tax, or
- 100% of the tax shown on the 2020 return
For joint returns, the spouse's income must be considered in determining if the taxpayer meets the two-thirds of gross income from farming requirement. Although missing the March 1 deadline may subject farmers to an underpayment of estimated tax penalty, April 18 remains the filing deadline for most individual taxpayers, including farmers. For more information on the significance of the March 1 deadline, read this post.
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.