2020 Tax Planning for Farmers – What You Should Know
We recently interviewed Kenny Nearhoof, accounting officer with Horizon Farm Credit. Kenny explained why tax planning in 2020 is a bit unique and how farmers can avoid any surprise tax bills.
Tax planning is important for farmers every year, but it is especially important this year. Can you help us understand why that is?
Tax planning should be a normal part of managing your farm business. Hopefully your accountant or tax advisor is on your team of professionals helping your farm business, but if not, at least make sure you have a tax planning visit scheduled with your accountant each year around this time.
The expectation to never pay taxes isn’t realistic, and isn’t the best approach for any business, but a good tax advisor can help you level out the year-to-year peaks and valleys. With planning, you can make informed personal and business decisions and better understand your overall tax position.
2020 has been unique in a lot of ways. For farmers, access to COVID-relief programs including the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) and Coronavirus Food Assistance Programs (CFAP and CFAP-2) may have tax implications.
One of the big challenges is that details on how all of these programs will be treated are still unclear. Even as we record this podcast, there is proposed legislation that may pass (or not pass) and have implications on how programs are handled. Therefore, I’ll talk about them as we know information today.
Let’s talk more about these COVID-relief programs. Could you walk us through each program and what farmers should know from a tax planning stand point?
Sure, let’s start with CFAP, which is likely the easiest to understand. CFAP is technically a disaster payment, similar to crop insurance. For that reason, we question whether it can be deferred for one year like crop insurance. One clear detail points to a “no” answer: only proceeds that are related to damage can be deferred, not proceeds related to price (CFAP is price-based). Since there is no final IRS ruling, the deferment door might remain open for specialty crops that go straight to market at harvest. To be safe, don’t count on deferring CFAP or CFAP-2 payments. CFAP payments are treated like Ag Program Payments that are taxable in the year received, and look out for a 1099 from the USDA/FSA.
Next, let’s tackle the Economic Injury disaster loan. EIDL will have a relationship with PPP if your PPP loan is forgiven – we will come back to this shortly. There are two different pieces to EIDL to understand – the “advance” money that people received very quickly, and the actual loan they signed for with the Small Business Administration. The Advance piece is treated like a grant – this will not need to be repaid - but this is taxable income. The actual loan portion is just like any other loan you get – the proceeds are not taxable, and the principal you repay is not deductible.
Now to PPP. If you got a PPP loan, and also got the “advance” portion of the EIDL program – the EIDL advance will count against your loan forgiveness amount (think of it as not being able to double dip on free money). As a simple example. If you got a PPP loan for $100,000, and an EIDL advance for $10,000 – the maximum loan forgiveness you can receive is $90,000. The remaining $10,000 is your PPP loan to repay.
Congress passed the CARES Act with clear intent that PPP loan forgiveness would be excluded from gross income for the recipient. What was not addressed in the CARES Act was whether payroll and other expenses covered by PPP funds would follow Internal Revenue Code or not. To summarize Code as plainly as possible, if you are not going to claim the income (forgiven debt), you can’t claim the associated deductions. At this writing, without action from Congress, you can’t claim your payroll expenses up to the amount that your PPP loan is forgiven.
This is a challenge for accountants because we want to make sure your gross wages expense on your tax return matches your W3 Wage Transmittal (the form that summarizes all your W2s for the Social Security Administration). With a longer period allowed (up to 24 weeks) to use the PPP funds, it makes sense to wait until early 2021 to apply for PPP forgiveness and use those 2020 payroll forms to further document the forgiveness application. The big question is whether we can use this inconsistency between Code and the intent of the CARES Act to benefit us in tax savings by (1) maintaining/carrying the PPP loan into 2021, (2) claiming all the payroll/other eligible expenses for 2020 and (3) applying for debt forgiveness in 2021 and showing that income in 2021.
Potentially, there is room for interpretation. It is similar to the strategy many farmers use of prepaying next year’s crop inputs in December, but not selling last year’s crop until March. There are many pieces to consider around the timing of PPP loan forgiveness, and everyone’s situation is unique. You should seek guidance from a tax professional on when to file your PPP loan forgiveness application and stay tuned for any post-election changes from Congress before year-end.
Is there anything else you’d like to share with farmers on this topic?
Yes, I think it’s important for farmers not to get overwhelmed, which is easy to do just with the information I shared today. That’s why it is so important to schedule an appointment with your tax advisor. He/she will be able to walk through all of these programs, along with the normal factors that have tax implications on your farm business.
We’ve had plenty of surprises here in 2020, and we don’t want your tax situation to be another. Be proactive and call your accountant.
If you are looking for an accountant who may better serve your needs, consider our Accounting, Records and Tax team at Horizon. In addition to doing taxes and tax planning, we offer a suite of services including accounting services such as software installation and support, management reports, in-house records services and payroll.