By Connor Muenks, CPA, Chubby Chukar Gamebirds
Of the many ways that I will remember 2020, I will consider it the year that ensured full employment of tax professionals. Shortly following a tax bill passing in December 2019, three rounds of coronavirus stimulus legislation were passed throughout 2020. This legislation affected the tax situation of every single American. There are some particular provisions that will specifically affect the tax reporting and strategies of NAGA members and other farmers.
The Paycheck Protection Program Loan, or the PPP loan, was one of the largest aspects of relief legislation passed for businesses in 2020. On December 27, 2020, the Economic Aid Act was passed, which allowed a second draw of the PPP loan for businesses that had a drop in gross receipts of at least 25% in any quarter of 2020 compared to 2019. Loans can be fully forgivable if businesses accepting the loans use at least 60% of the loans on payroll and the other 40% on other allowable expenses. The first and second PPP draws are now calculated as 2.5 times monthly average payroll for 2019 or 2020, whichever is greater. Businesses with a NAICS code beginning with a 72, which includes hunting lodges, hotels and restaurants, are allowed to calculate their second PPP loan based on 3.5 times average monthly payroll. Farmers that operate as sole proprietors and file a schedule F can now determine their PPP loans based on 2.5 times average monthly gross income for 2019 or 2020, up to $100,000. For many farmers that do not have any employees, this means the maximum loan amount will be $20,833. Farmers that have already received a PPP loan can apply for a larger loan based on the gross receipts method as long as they have not yet received forgiveness. For those who qualify and have not yet applied, the deadline to apply is March 31, 2021.
A very important change to the PPP program is the ability for a business to take a PPP loan and still take advantage of the Employee Retention Credit, discussed below. The deductibility of PPP proceeds was also altered by the Economic Aid Act. All forgiven PPP proceeds are tax-exempt, and the related expenses are tax deductible. For businesses that received an Economic Injury Disaster Loan (EIDL) advance, these advances will no longer reduce possible PPP forgiveness; the EIDL proceeds will also be fully tax-free just like PPP proceeds.
Employee Retention Credit
One other major piece of the legislation passed in December of 2020 was the expansion of the Employee Retention Credit, or ERC. This credit did not get very much attention when it was originally created in March of last year, because it was not allowed to be taken by businesses who accepted a PPP loan. The programs are no longer mutually exclusive. For any business that shows at least a 50% decrease in revenue for a 2020 quarter compared to 2019, the credit is equal to 50% of wages paid per employee, up to $10,000 per employee for the year. The Economic Aid Act extended this credit; businesses can qualify in 2021 by only showing a 20% decline in 2021 revenue compared to 2019. The credit is equal to 70% of employee wages up to $10,000 per employee per quarter and is allowed through June 30, 2021. Businesses will qualify for the ERC quarter-by-quarter and will take the credit on their quarterly federal form 941s. Unlike the PPP, though, the ERC cannot be taken by sole proprietors who do not have any employees, and it is also not tax-free money; any retention credit received reduces the amount of deductible salary expenses.
Because the ERC and the PPP are no longer mutually exclusive, businesses with employees that qualify for both programs need to plan accordingly. Because the same wages cannot be used for both programs, businesses should use as few wages for the PPP as possible. Sixty percent of loan forgiveness must be related to payroll. This includes wages, health insurance and other benefits, and state unemployment tax. As soon as 60% of the loan is used by these funds, businesses should look at the “allowable non-payroll costs” bucket to fill up the other 40% of the loan amount. This includes utilities, rent, interest on debts, operations expenses, supplier costs, property damage costs due to vandalism and worker protection expenditures. I think the most important and useful category for NAGA members will be the supplier costs. This includes purchases of goods that are considered essential to the operations of the business and are either related to a purchase order in place prior to obtaining the PPP loan, or for goods considered perishable that are ordered before or after the PPP loan is obtained. I will let someone else decide if gamebirds are considered perishable; it almost seems too obvious, especially to anyone that has raised quail! But for hunt clubs that have contracts in place for the purchase of birds, paying for these birds under contract would certainly count towards this category. For producers, feed or hatching eggs should both be considered perishable and count towards this category as well. Be sure to review all these categories to get the most out of the allowable non-payroll portion of the loan. The covered period to use these loan expenses is up to 24 weeks. Since the ERC expires on June 30, PPP expenses incurred after June 30 but within the covered period should be taken into account in order to potentially take full advantage of both programs.
Coronavirus Employee Leave Credit
The passage of the Families First Coronavirus Response Act in March created a credit for employers who pay employees for time off from work due to the coronavirus pandemic. If an employee is away from work because he or she has COVID-19, is showing signs of COVID-19 or is subject to a government quarantine, the credit is equal to two weeks of regular pay, up to $511 per day. If the employee is away from work because he or she is caring for an individual who has symptoms of COVID-19 or has a child whose school or place of care is shut down due to COVID-19, the credit is equal to the lesser of $200 per day or two-thirds regular pay for up to 10 weeks. Please note, this credit requires the employee or their dependent to seek a medical diagnosis for COVID-19 if that is the reason the credit is being claimed. The leave credit is available between April 1, 2020 and March 31, 2021.
The credit is claimed for employers on their quarterly federal tax return, form 941. Self-employed people can also take this credit. The credit limits are the same as above ($511 per day or $200 per day), but they are also limited by “average daily self-employment income.” In other words, self-employed members that show losses for their business would not be able to take this credit. Self-employed individuals will claim this credit on their individual 1040 tax return. The leave credit allows for a one-time allotment of the credit per employee; if an employee is out of work for COVID-19 twice between April 1, 2020 and March 31, 2021, only one two-week period of time off work would be eligible.
In any sector of farming, the planning of asset purchases and the treatment of these purchases plays a major role in tax planning. The current state of the tax law and its prospects for future change make it especially important to plan for large capital outlays.
For tax year 2020 and 2021, every single farm asset purchase made can be fully deducted, including buildings. However, fully deducting all assets purchased may not be the most prudent decision. It is often difficult to explain to a client how paying more tax would be a good thing, but that can often be the case. There are a lot of businesses that will show a loss in 2020, especially with the enhanced PPP deductibility law discussed above. However, the CARES Act of March 2020 created the ability to carry a 2020 loss all the way back to 2015, when tax brackets were higher than they currently are. For those that will show a loss in 2020, the decision to fully deduct assets through bonus depreciation or section 179 expensing will depend on what tax bracket someone was taxed at in those prior years. If income prior to 2020 was fairly consistent, it might be a better decision to depreciate assets over their useful lives. This gives the effect of using the deduction of these capital purchases over several years, which could result in it being taken against income at higher brackets, especially if tax rates are increased through future legislation. While we do not yet know what changes would pass through congress, there is sentiment that tax rates under a Biden administration would see an overall increase. This would mean that today’s capital purchases could have more valuable deductions in the future.
With all tax-related decisions, it is important to discuss any topics above with your tax advisor. Consider potential changes to your tax situation as well, such as retirement or expected increases in income as these can affect future planning. If you have a specific question, I would also love to help you out. I can be reached at firstname.lastname@example.org or (573) 680-9816.
Connor Muenks is employed at Evers and Company, CPAs in Jefferson City, Missouri. He also manages the hatchery at his family gamebird farm, Chubby Chukar Gamebirds. Connor is a former John Mullin scholarship winner. Outside of work, Connor enjoys playing as much golf as possible.