Update: March 29, 2021
Paycheck Protection Program
SBA is currently offering PPP loans until May 31, 2021.
The Paycheck Protection Program (PPP) provides loans to businesses to keep their workforce employed during the Coronavirus (COVID-19) crisis. Farmers are eligible for PPP loans through the Small Business Administration (SBA), if they have fewer than 500 employees. Borrowers may be eligible for PPP Loan Forgiveness if certain conditions are met.
The PPP loans are facilitated through participating lending institutions with established SBA relationships. Farmers can also work with the Farm Credit Service organization that services their geographic area. Some lenders and Farm Credit Services are limiting their PPP lending to businesses with whom they have existing relationships. The SBA offers a map and search function for those seeking a PPP loan and looking for eligible PPP lenders. After reviewing the eligibility criteria below, the first recommendation is for farmers to call their current lender(s) to see if they have that SBA relationship and ask if they are accepting PPP applications. Be sure to inquire if the lender has their own loan restrictions, application form and documentation requirements.
Who may qualify?
Small businesses and farms who have fewer than 500 employees (those receiving W2s in the previous year) may qualify. Independent contractors/self-employed farmers and small businesses are also eligible to make their own applications to this program.
- Sole proprietors, independent contractors, and self-employed persons.
- Any small business concern that meets SBA’s size standards (either the industry size standard or the alternative size standard).
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans’ organization, or tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
- 500 employees, or
- That meets the SBA industry size standard if more than 500.
- Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location.
- Have been in operation on February 15, 2020.
Self-employed or sole proprietor farmers are eligible for a PPP loan if they:
- Were in operation on Feb. 15, 2020.
- Have self-employment income (gross income).
- Principal residence is the U.S.
- Filed or will file a Schedule F for 2019 or 2020
Partners in partnerships or members of an LLC taxed as a partnership should submit one PPP application for the partnership/LLC. The self-employment income of general active partners or LLC members/managers can be reported as payroll costs (up to $100,000 annual salary basis) filed on behalf of the partnership or LLC.
How much can a farmer borrow through the PPP loans?
The amount of the loans are 2.5 times the amount of your average monthly payroll costs from the prior 12 months or the 2020 / 2019 calendar year, capped at $10 million. For specific direction on calculating the loan, the SBA website has details on how to calculate First Draw PPP loan amounts based on the type of business entity. See below for loan amount calculations.
Payroll costs included in the calculation
Payroll costs, including wages, benefits, such as paid leave, health care benefits, any allowance for dismissal or separation, and any state and local taxes assessed on employee compensation, are included in the calculation for the PPP loan amount. The portion of federal taxes that are normally taken from the employee’s gross wages can be included in the calculations and used to pay their portion of federal employment tax. Housing stipends or allowances are considered part of payroll and subject to the $100,000 per employee limits.
Excluded from payroll costs
The employer’s share of payroll taxes should be excluded from the calculations.
The PPP cannot cover the costs of paying independent contractors (those who get 1099s instead of W2s). Independent contractors and other self-employed individuals, including farmers, should apply for their own PPP loans.
The PPP loan cannot cover payroll for those employees whose principal address is not within the United States. See IRS regulations (26 CFR § 1.121-1(b)(2)) for additional guidance on determining an employee’s principal place of residence.
Qualified sick and family leave for which a credit is allowed under section 7001 and 7003 of the Families First Coronavirus Response Act is also not covered.
How does a farmer with employees calculate the loan amount?
- Step 1: Calculate payroll costs by adding the following:
- For self–employed (farmers and ranchers): 2019 or 2020 Form 1040 Schedule F line 9 gross income, up to $100,000 annualized (not eligible for a loan if this amount is zero or less). If the 2020 return has not been filed, borrowers are instructed to fill it out and compute the value.
- For partnerships: 2019 or 2020 Schedule K-1 net earnings from self-employment of U.S. based general partners subject to self-employment tax, computed from box 14a (reduced by Section 179 expenses, unreimbursed partnership expenses, and oil and gas depletion) multiplied by .9235, in an amount up to $100,000 per partner.
- Add up payroll costs from 2019 or 2020 for employees whose principal place of residence is in the United States (subtract compensation paid to an employee in excess of $100,000 each, annualized) (if self-employed or a partnership and have no employees, there will be no additional payroll costs to add). See below for information about eligible payroll costs.
- Step 2: Divide the total amount from Step 1 by 12.
- Step 3: Multiply the amount from Step 2 by 2.5.
- Step 4: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (because it does not have to be repaid).
Can a farmer without employees receive a loan for their own lost income?
Self-employed farmers and ranchers (i.e., those who report their net farm profit on IRS Form 1040 Schedule 1 and Schedule F) should use IRS Form 1040 Schedule F.
- Step 1: Find your 2019 or 2020 Form 1040 Schedule F line 9 for gross income amount. If this amount is over $100,000, reduce it $100,000.
- Step 2: Calculate the average monthly gross income amount by dividing the number from Step 1 by 12.
- Step 3: Multiply the average monthly next profit amount from Step 2 by 2.5.
- Step 4: Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any “advance” under an EIDL COVID-19 loan (which does not have to be repaid).
Only self-employed who file a Schedule F (self-employed farmers/ranchers) can use gross income to determine the loan amount. Farmers that file taxes as partnerships must calculate by using net earnings. More information about calculating loan amounts based on the type of business structure can be found the SBA website page: How to calculate First Draw PPP loans and what documentation to provide – by business type.
How to calculate the loan if you’re a seasonal employer
Seasonal employers can determine their maximum loan amounts by selecting any 12-week period between February 15, 2019 and February 15, 2020 and using the average total monthly payroll costs and multiplying by 2.5.
How can these loan proceeds be used?
- Owner compensation replacement (for the self-employed).
- Payroll costs.
- Cost related to the continuation of:
- employee benefits, and
- employee benefits during periods of paid sick, medical or family leave.
- Mortgage interest payments (but not prepayments or principal payments) on business mortgage on real or personal property.
- Business rent payments.
- Business utility payments.
- Interest payments on other debts incurred before 2/15/20 (not forgivable).
- Refinancing a SBA EIDL loan made between Jan. 31, 2020 and Apr 3, 2020.
The Economic Aid Act that was signed into legislation on December 27, 2020 made additional business costs eligible. Those four additional categories of eligible non-payroll expenses include:
- Certain operational expenses, such as payments for software, cloud computing services, human resource and accounting needs.
- Property damage costs: defined as costs that are related to property damage and vandalism or looting due to public disturbances that occurred during 2020 and not already covered by insurance or other compensation.
- Supplier costs, i.e., expenditures that a borrower made to a supplier of goods pursuant to a contract, purchase order, or order for goods in effect before the borrower’s applicable PPP loan disbursement that were essential to the borrower’s operations at the time the expenses were incurred.
- Worker protection expenses, such as the costs of personal protective equipment for employees or expenses including capital costs to adapt the business to comply with federal, state, or local requirements or guidance with respect to the COVID-19 pandemic.
Are these truly forgivable loans?
At least 60 percent of the PPP loan proceeds must be used for payroll expenses. If an EIDL is refinanced, that amount will be used in the calculation to determine the percentage used for payroll costs. If 60 percent is not used for payroll, a proportionate amount of the loan can be forgiven.
If PPP funds are used for unauthorized purposes, the borrower will be required to repay the loan. Additional liability may be placed on a borrower who knowingly uses the funds for unauthorized purposes. This additional liability could include charges for fraud.
PPP loans will be forgiven as long as:
- The loan is used to cover payroll costs, and mortgage interest, rent, and utility costs over the 24-week period after the loan is made; and
- Employee and compensation levels are maintained. Unless an exemption to maintaining these levels applies to the farm’s or business’s circumstances.
- For a loan to be completely forgiven, no more that 40% of the loan can be used for anything other than payroll. For example, if you use 45% of the loan for mortgage interest, rent and/or utilities, you are required to pay back 5% of the total loan because that is the amount over the 40% you spent on things other than payroll costs.
If someone is required to pay back a portion of the loan, what are the loan terms?
- Interest at 1%, accrues immediately.
- Payments deferred for six months.
- Loan due in two years if the loan was made before June 5, 2020. If the loan was made on or after June 5, 2020 the loan is due in five years. However, as with any loan, there is always potential for renegotiation. Lenders and borrowers can discuss and if they both agree, the earlier loans could be modified.
Forgiveness process for loans of $150,000 or less
Borrowers that received $150,000 or less can apply for forgiveness using the SBA Forgiveness Application Form 3508S (effective Jan. 19, 2021). These borrowers are not required to submit an application or documentation in addition to the certifications and information required by the Small Business Act. Borrowers must retain records that prove their compliance with the PPP requirements for four years (employment records) and for three years for any other records. Borrowers could be audited or reviewed by SBA.
Can I ask for an increase in my PPP loan that I’ve already received (First Draw Loans)?
Borrowers who have not yet received forgiveness can request an increase in their loan amount if they returned all or part of a PPP loan or didn’t take all of a PPP loan to which they were entitled. A borrower can also be eligible to increase a first loan if the rules changed that allows for an increase. The Center on Agriculture Law and Taxation (CALT) has more information on these circumstances in its blog post: SBA Has Issued Rules for First Draw, Second Draw, and Increased PPP Loans under the section: Increases to First Draw Loans.
Second Draw Loans
The Economic Aid Act authorized the Second Draw Loans with the same terms and conditions as first draw loans to borrows who have previously received a First Draw Loan and have used or will use the full amount of their initial PPP loan for authorized purposes on or before the expected date of disbursement of their Second Draw Loan. Eligibility for the Second Draw Loan include businesses with 300 or fewer employees and has a revenue reduction of 25% or more in 2020 when compared to 2019. More information on revenue reduction calculations can be found at the same CALT blog post: SBA Has Issued Rules for First Draw, Second Draw, and Increased PPP Loans under the section: Second Draw/Revenue Reduction
Economic Injury Disaster Loan Program
The Economic Injury Disaster Loan (EIDL) purpose is to meet financial obligations and operating expenses that could not have been met had the disaster not occurred. These are loans that the borrower makes an application directly to the SBA.
While the EIDL Advance funding has all been distributed, the EIDL COVID-19 loan program is still open for applications. The online application is available at address: https://covid19relief.sba.gov/#/
To be eligible for an EIDL, a business must have 500 or fewer employees and have been in operation by January 31, 2020. The following types of business are eligible for EIDL:
- Sole proprietorships, with or without employees,
- Independent contractors, with or without employees,
- Employee owned businesses,
- Tribal small businesses,
- Private non-profit that has tax exemptions under 501 (c), (d) or (e).
The SBA EIDL COVID-19 loans amounts are for six months of working capital, up to a maximum of $150,000. The interest rate is 3.75% for businesses and 2.75% for non-profits. Maximum loan term is 30 years. The emergency loans are not forgiven (except for emergency advances).
Loans can be used to cover:
- Fixed debts (like mortgages but not on federal debts),
- Accounts payable,
- Other operating expenses.
Can Businesses Apply for both the EIDL and Paycheck Protection Program (PPP)?
A borrower can generally obtain both an EIDL and PPP; however, the proceeds may not be used for the same purposes. A borrower still must meet eligibility requirements for each program individually. If an application has already received other disaster assistance that must be declared in the application.
Go to the SBAs web page COVID-19 Economic Injury Disaster Loans and its Frequently Asked Questions about COVID-19 EIDL Loans for the most up to date information.
Here are links for more information from the Small Business Administration:
The Small Business Administration regularly updates its PPP FAQ site.
US Small Business Administration’s Coronavirus Relief Options: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options
Tidgren, K. (January 9, 2021). Center for Iowa Agricultural Law and Taxation. https://www.calt.iastate.edu/blogpost/sba-has-issued-rules-first-draw-second-draw-and-increased-ppp-loans
Hearn, C.R., Decuir, A.A. (January 14, 2021). The National Law Review. https://www.natlawreview.com/article/current-ppp-borrowers-what-do-i-need-to-know-about-economic-aid-act