Key Tax Considerations for Farmers in Early 2021
Between the pandemic, a trade war, and assorted natural disasters, agricultural producers, like most other businesses, faced a difficult 2020. As many farmers file 2020 income tax returns, they and their tax professionals are sorting through unusual sources of income, analyzing whether new COVID-19 tax benefits apply, and determining how to report these items on their income tax returns. This article provides a brief summary of several key issues, with the caveat that pending legislation could change the rules again at any time.
Tax Considerations for Common COVID-19 Relief
Economic Impact Payments / Recovery Rebate Credits
Many farmers, like most Americans, received two rounds of economic impact payments, also called “stimulus payments” during the past year. The U.S. Treasury generally issued the first round of payments, authorized by the CARES Act, Pub. L. 116–136 (March 27, 2020), in mid-2020. The agency issued the second round, authorized by the Consolidated Appropriations Act of 2021 (the “CAA”), Pub. L. 116-260 (December 27, 2020), in early 2021. Payments under the first program were generally $1,200 per taxpayer and $500 for each qualifying child (generally those under 17 years of age). Payments under the second program were generally $600 per taxpayer and $600 for each qualifying child. Payments were reduced or eliminated as income climbed above $75,000 for single taxpayers and $150,000 for married filing jointly.
Taxpayers must reconcile both set of payments on their 2020 income tax returns. Because these payments were an advance of a newly-created “recovery rebate credit”—a fully refundable tax credit—they are not included in gross income and they do not generate tax liability. Taxpayers who did not receive advance payments in amounts up to the recovery rebate credit to which they are entitled, may claim the credit on their 2020 return. If a taxpayer received a payment that is more than their calculated recovery rebate credit, the taxpayer does not repay the difference.
As filing season opened, the IRS created a new online tool so that taxpayers could verify the amount of economic impact payments they received. This new tool can be accessed at https://www.irs.gov/payments/view-your-tax-account.
At the time of this writing, Congress is debating a third round of stimulus payments. Taxpayers may consider whether filing the 2020 return and having IRS consider that income when determining eligibility would be more beneficial than the 2019 return. If a 2020 return is not on file at the time a new round of stimulus payments is issued (if they are indeed authorized), the 2019 return will likely be used.
Paycheck Protection Program
Perhaps generating more attention and questions than any other COVID-19 relief provision, 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 key to the PPP is that if borrowers spend their loan proceeds on allowable expenses, including payroll and owner compensation, the loan is fully forgiven. Many farmers received PPP loans in 2020.
The CAA’s Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) allocated an additional $284 billion to a reauthorized and revised Paycheck Protection Program. The new program, authorized through March 31, 2021, allows 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.
New Farmer Rule
Section 313 of the Economic Aid Act retroactively changed the way that a PPP loan is calculated for a self-employed farmer or rancher. Rather than calculating the loan amount using net farm income (as shown on line 34 of Form 1040, Schedule F), the new law directs these farmers to calculate their loan amount using gross farm income, as shown on line 9 of Schedule F. Eligible farmers may use this new calculation to (1) request a first draw loan if they did not receive one in 2020, (2) request an increase to a first draw loan that they received in 2020 if forgiveness for that loan has not been granted, or (3) request a second draw loan if they received a first draw loan and otherwise qualify.
As of the time of this writing, only self-employed farmers who file a Schedule F in their own right are eligible to use the new farmer rule. SBA guidance does not allow a farm partnership to use its Schedule F in calculating the partnership compensation portion of the loan.
For more detailed information on the PPP, read this post. On March 3, 2021, SBA issued a new interim final rule allowing Schedule C taxpayers to apply for loans using their gross, rather than net income. This provision, however, does not allow borrowers who have already received a loan to receive an increase. It also states that borrowers with more than $150,000 in gross income will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith, and the borrower may be subject to a review by SBA.
Tax Treatment of Forgiven Loan Proceeds
The CARES Act provided that the proceeds of PPP loans, if forgiven, are excluded from the gross income of the borrower. Treasury guidance (IRS Notice 2020-32 and Rev. Rul. 2020-27), however, directed that expenses paid with loan proceeds “reasonably expected to be forgiven” were not deductible. This rule, in essence, rendered the exclusion from gross income unhelpful for many businesses because the elimination of the deduction offset the benefit of the income exclusion. In section 276 of the CAA’s COVID-Related Tax Relief Act of 2020 (the “Tax Relief Act”), Congress explicitly overrode the Treasury guidance by providing that “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.”
While some states may treat forgiven loan proceeds and their corresponding deductions differently, PPP loan proceeds will not be reported on a Form 1099 and will not be reported on the borrower’s federal income tax return. Businesses that paid otherwise deductible expenses with PPP loan proceeds will continue to deduct those expenses—most notably payroll costs—on their tax returns. Although the new law allows owners of pass-through entities to retain the benefit of the income exclusion by allowing a basis increase when the loan is forgiven, Treasury has not yet provided guidance as to how to report these items.
Iowa law follows the federal law with respect to the treatment of PPP loans and expenses for the tax years beginning in 2020 and beyond. Borrowers that used forgiven loan proceeds to pay business expenses during a tax year that began in 2019, however, are currently unable to deduct these expenses under Iowa law. Iowa SF 364, as amended by H-1122, passed by the House on March 3, would correct this anomaly.
Economic Injury Disaster Loans
In 2020, some farmers also received Economic Injury Disaster Loans (EIDL) from the SBA. Although these loans were not forgivable, the CARES Act allowed those who applied for such a loan (whether or not they actually took out the loan) to receive an EIDL advance. This was a grant in an amount up to $10,000. The SBA limited to grant to $1,000 per employee, up to a total of $10,000, for eligible businesses. In mid-2020, Congress specifically granted permission for farmers to receive EIDL loans and EIDL advances.
Under the CARES Act, an EIDL advance was not excluded from gross income. The EIDL advance also reduced the amount of PPP forgiveness a borrower could receive. In other words, if a farmer received a $100,000 PPP loan and a $10,000 EIDL advance, the CARES Act required the farmer’s PPP loan forgiveness to be restricted to $90,000.
Section 278 of the Tax Relief Act, however, changed these rules retroactively. Under current law, EIDL advances are excluded from gross income and corresponding expenses remain deductible. Additionally, PPP loan forgiveness is not reduced in the amount of the EIDL Advance. SBA has automatically remitted amounts withheld from PPP forgiveness to the appropriate lenders.
Iowa couples fully with these provisions for tax years beginning in 2020.
CARES Act State Grants
Many farmers may have received other grants funded by CARES Act money provided to their states. In Iowa, for example, such programs included the Livestock Producer Relief Fund and the Beginning Farmer Debt Relief Fund. These grants are not excluded from gross income under federal law. As such, they should be reported as regular farm income on the Schedule F. State treatment of these grants may vary.
Pandemic Unemployment Compensation
Iowa SF 364, as amended by H-1122, passed by the House on March 3, would exclude pandemic unemployment compensation from Iowa taxable income. This exclusion would apply only to the federal supplemental unemployment compensation, not to the standard state unemployment compensation.
Employee Retention Credit
Section 2301 of the CARES Act allowed “eligible employers” an employee retention credit (the “ERC”), equal to 50 percent of “qualified wages” paid to each employee for each calendar quarter during the COVID-19 crisis. The ERC is a fully refundable payroll tax credit. “Eligible employers” were those employers whose businesses were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. “Eligible employers” also included those employers that experienced a “significant decline in gross receipts” for a given calendar quarter.
An employer became an “eligible employer” under the “significant decline in gross receipts” test during the first calendar quarter for which gross receipts for that quarter were less than 50 percent of gross receipts for the same calendar quarter in 2019. The eligibility period ended in the calendar quarter following the first calendar quarter in which gross receipts were greater than 80 percent of gross receipts for the same calendar quarter in 2019. The qualified wages which could be taken into account could not exceed $10,000 per employee for all quarters in 2020. In other words, the total 2020 credit for which an employer could receive for each employee in 2020 was $5,000. The credit was taken against the applicable employment taxes on the qualified wages, but any excess was fully refundable.
Many agricultural producers who would otherwise have been eligible for the ERC in 2020 were unable to claim the credit because the CARES Act required businesses to choose between a PPP loan or the ERC.
Section 206 of the CAA’s Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Disaster Tax Relief Act”) retroactively changed the law to allow employers who received PPP loans to qualify for the ERC, as long as the payroll expenses paid with forgiven PPP proceeds are not the same wages used to claim the ERC. This change means that many agricultural producers may now qualify for the 2020 ERC. To retroactively claim the credit, they may file a Form 943-X or a Form 941-X, as appropriate. On March 1, 2021, IRS issued Notice 2021-20, providing guidance with respect to the interaction between PPP and ERC qualified wages. The guidance also details the rules for the 2020 ERC.
Section 207 of the Disaster Tax Relief Act extended and significantly expanded the ERC for 2021, through June 30, 2021. From January 1, 2021, through June 30, 2021, the new law increases the credit percentage from 50 percent of qualified wages to 70 percent. Additionally, employers can count qualified wages up to $10,000 per employee per quarter (instead of across all quarters) in calculating the credit. This means that an eligible employer can claim up to a $14,000 credit per employee in 2021. And becoming an eligible employer under the decline in gross receipts test is much easier. Employers may now generally qualify for the credit if their gross receipts for a calendar quarter are less than 80 percent of the gross receipts for the same calendar quarter in calendar year 2019. Many farm businesses may qualify for the newly expanded ERC. The self-employed, however, are generally ineligible for the ERC.
For more detailed information on the ERC, read this post. Pending legislation (American Rescue Plan passed by the House on February 27) would extend this credit through the end of 2021.
Families First Coronavirus Response Act Credits
In March of 2020, the Families First Coronavirus Response Act (FFCRA), H.R.6201, was signed into law. This temporary expansion of the Family and Medical Leave Act, required most private employers with fewer than 500 employees to provide emergency paid sick leave and emergency paid family and medical leave to their employees for coronavirus-related absences from April 1, 2020, through December 31, 2020. The FFCRA created a corresponding refundable paid sick leave credit and paid family leave credit for these employers. The credit includes the amount of health insurance costs paid during the leave period by the employer. Self-employed individuals were offered equivalent tax credits. Section 286 of the Tax Relief Act extended the FFCRA leave credits through March 31, 2021. It did not, however, extend the requirement that employers provide this leave. In other words, employers may choose to provide COVID-19-related leave to their employees, and if they provide it, they are eligible for the FFCRA tax credits.
While most credits under the FFCRA are claimed on the Form 941 or Form 943 payroll tax returns, the self-employed claim tax credits for their lost income when filing their 2020 tax returns. For these taxpayers, the tax credit is calculated on Form 7202 and claimed on the Form 1040.
IRS has provided a number of helpful FAQs on this credit. Pending legislation (American Rescue Plan passed by the House on February 27) would reset and extend this credit through September 30, 2021.
Net Operating Loss Changes for Farmers
Section § 2303(b) of the CARES Act modified IRC § 172(b)(1) by adding a new subsection (D) providing that net operating losses (“NOLs”) arising in tax years beginning in 2018, 2019, and 2020 were carried back five years. The new five-year rule applies to all businesses, including farming businesses and casualty insurance companies. Section 2303 of the CARES Act also modified section 172(a) to provide that, for taxable years beginning before January 1, 2021, a net operating loss carryover and/or carryback may offset 100 percent of taxable income.
After the CARES Act changes, farmers no longer had a two-year carryback option for the 2018, 2019, and 2020 tax years. They now had a five-year carryback or could elect to waive the carryback altogether. But when the CARES Act removed the two-year carryback for those tax years, the new law did not provide farmers with an option to revoke their previous elections. In other words, if a farmer did not carry an NOL back two years in 2018 and 2019, the CARES Act provided the farmer with no option to take advantage of the CARES Act five-year carryback. If a farmer did carryback an NOL two years in 2018 or 2019, the CARES Act allowed that farmer to carryback that NOL five years, either by filing Form 1139 or 1145 for an expedited refund (if the time has not expired) or by filing an amended return to recover a refund. But it remained unclear what would happen if a farmer failed to take action to carry the two-year NOL back five years.
Section 281 of the Tax Relief Act addressed these issues by allowing the farmer to elect—for tax years 2018, 2019, or 2020—to disregard the CARES Act changes. An election under this special provision means that a farmer maintains a two-year carryback (with the 80 percent income limitation) for tax years 2018, 2019, and 2020. This election is made by the due date for filing the taxpayer’s return for the first taxable year ending after December 27, 2020. Once made, this election is irrevocable. Farmers who take no action to amend 2018 or 2019 returns are automatically electing to leave the two-year carryback with the income limitation in place. No action is required for this choice, but after the due date for 2020 returns, that inaction becomes an irrevocable election to apply the pre-CARES Act rules. The Tax Relief Act also allows farmers to revoke a prior election to waive a carryback for the 2018 and 2019 tax years. In other words, farmers who previously waived the two-year carryback may now revoke that election and carry the NOL back five years for tax years 2018 and 2019.
New Income Sources and Their Application to the 2020 Return
Market Facilitation Program Payments
Many farmers received a third round of 2019 market facilitation program (MFP) payments in February of 2020. These were the final payments provided by the program intended to compensate farmers for damage stemming from trade disruptions. The 2019 MFP payments to Iowa farmers, for example, totaled $1.6 billion, with the 2020 payment comprising 25 percent of the total. Farmers must include these payments in gross income (subject to self-employment tax) for the year in which they are received. See IRS Chief Counsel Memorandum 2018-21. They are reported on lines 4a and 4b of IRS Form 1040, Schedule F. See Schedule F Instructions, page 4.
CFAP 1 and CFAP 2
The Coronavirus Food Assistance Program (“CFAP”) was created to compensate farmers for losses associated with COVID-19. CFAP 1, unveiled in May of 2020, compensated producers through a combination of $9.5 million in CARES Act funding and $6.5 million in Commodity Credit Corporation funding. The first round of payments was issued in June, with the second round paid in August. Approximately $10.5 billion was paid to farmers through CFAP 1, with around 40 percent of those payments made to cattle producers.
CFAP 2 was announced September 18, 2020, with applications allowed through December 11, 2020. USDA issued $13.2 billion in CFAP 2 payments, with 25 percent of those payments made to corn producers.
On January 15, 2021, USDA announced what’s been called CFAP 2.1, a program designed to provide allocated funds unused by the first two programs (approximately $2.3 billion) to some poultry, hog, and specialty producers hit especially hard by the pandemic. Although applications were accepted through February 26, 2021, the new administration has halted payments and implemented a regulatory freeze so that it can further review the program.
Farmers must include CFAP payments in gross income (subject to self-employment tax) for the year in which they are received. They are reported on lines 4a and 4b of IRS Form 1040, Schedule F. See 2020 Publication 225, page 2.
Syngenta Settlement Payments
Although unrelated to the pandemic, Syngenta settlement payments were another source of unusual income for most corn farmers in 2020. Beginning in March of 2020, eligible producers and crop share landlords began receiving interim payments from the $1.5 billion Syngenta settlement. Final payments began issuing at the end of 2020, with many farmers not receiving them until early 2021. Because the Syngenta payments were intended to compensate recipients for lost profits from farming, cash-basis farmers should report the payments as ordinary income, subject to self-employment tax, for the year in which they receive them. Crop share landlords report the payments as they would report other crop share income.
What About the March 1 Deadline?
With tax software missing key updates and some important questions remaining unanswered, some farmers who did not pay estimated tax by January 15 were not be in a position to file their returns by March 1. Although missing the March 1 deadline may subject these farmers to an underpayment of estimated tax penalty, April 15 remains the filing deadline for most individual taxpayers, including farmers. This post reviews the special estimated tax rules for farmers and the significance of the March 1 deadline.
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.