We recently interviewed Devin Winklosky. Devin owns and operates a two-acre hops farm in Western Pennsylvania, which he started into 2020, called Teufel Hunden Hops Company. Devin is also a 2021 recipient of the Horizon Farm Credit Jumpstart Grant, which awarded 15 startup farmers with a $10,000 grant.

Devin, there is a lot more to your story than what I shared in that short introduction. Could you tell our listeners a bit more about yourself and how you became a hops farmer?

I'm a native Pennsylvanian. I was born in Western Pennsylvania in Latrobe, PA but I grew up on a farm in Derry Township. When I graduated from high school, I went off into the military and served about 22 years in the Marine Corps.

My sisters, my brother, and my parents continued to farm in Pennsylvania. When I retired from the Marine Corps and came back to the area, I really wanted to get back into what my family heritage was and what my family had been doing, which was farming.

The Marine Corps made me a lawyer. I loved the law and I loved helping people, but I really longed to do something that was more in my roots. I considered what possibilities were out there, and for me it was a confluence of three things. For one, I looked at the Pennsylvania craft brewing boom that was happening at about that time and that Pennsylvania was really becoming one of the top three states that craft breweries were springing up in. The second was that people were interested in local ingredients. Then the third thing was that I had a farming background, so I hatched this idea to farm hops. I approached my brother-in-law with this crazy plan. A couple years later, here we are. Two years and 1500 hop plants later, we have our Teufel Hunden Hops Company business.

Devin, you are the first hops farmer that we've had on our podcast, and I'm sure our listeners, like myself, are interested in learning more about hops farming. For those of us with limited knowledge, could you share a bit more about how hops are grown, how they're processed, and then how you market your product

I'm honored to be the first hop farmer on the podcast. I hope I won't be the last one on your show, but I'm glad that I can share some information about hops in general and how they're grown.

A lot of people may know that hops are a main ingredient in beer. Beer has four main ingredients: water, barley, yeast, and hops. Hops usually add the bitter flavor to the various types of beer.

As a plant, hops are perennials. You put a rhizome in the ground. It's primarily a root. The growing season is from about March through September. The plant shoots up what are called bines. They're not vines, they're bines because they have these little prickly things that can attach to cord that comes down from a trellis.

We built a trellis that has 18-foot poles, a wire system, and a cable system that is about 18 feet in the air. We have what's called coyer that come down from the wires up at the top and go to the root of the plant. Like I said, the plant has a bine that grows up and spirals around the coyer. From that bine, cones are produced. The cones are what contain the flavoring and the substance that's used in the beer.

We harvest it and cut down the bines. We feed them through a harvester to shake off the cones. We take the cones and we put them in an oast, which is just a fancy name for a dryer. We dry them down to about 8%, and then we put them into a pelletizing system. We put them through a hammer mill, powder them, pelletize them, and then package them into sealed packaging.

The pellets are what are marketed. They are what the brewers use for their particular brews. Before we sell them, we send them off to a lab to get a chemical profile. The acids and the oils that are contained in the hops are what the brewers use to make their own flavor recipe for the particular kind of beer that they want to craft.

That's pretty much the life span of a hop. It goes from being the perennial plant that's in the ground in the trellis system, to the hop yard, all the way through pelletizing into the brew that you get at your local craft brewery. The Ohio Hop Growers Guild, they refer to it as bines to steins. They go from the bine in the hop yard to the stein on your table.

You had mentioned earlier that you grew up in a farming family, but obviously, starting the hops farm was an entirely new endeavor for you. What did you find most challenging in your quest to begin farming, and what resources did you find helpful in getting started?

I think hops farming for farmers in the Eastern part of the United States, is an entirely new endeavor, not just for me, but even for established farmers who are trying to diversify their operations. It's something that's fairly new. I think it's something that's growing. For me it definitely was an entirely new endeavor.

One challenge is the scale. My two acres is really not very much compared to the big hop growers that are up in the Northwest of the United States. One difficulty was trying to find people who had started hop operations or had started hop yards of about the same size as mine. It was good to know the difficulties they had faced based on their location, soil type, and what type of materials were best for them to use to build the trellis. We were practically putting 80 telephone poles into the ground with aircraft cables in the air. That is not something you normally do in the middle of a pasture. Identifying materials, knowing the right place to put it, and establishing the yard itself was challenging.

Putting a cost figure to that was also hard. How much does it cost to do this from the ground up? If I already have some materials or some equipment, how does that remove some costs from the equation?

When you're talking about equipment, the other thing that was challenging to look at was specialty equipment for this kind of crop. You're working up in the air in a trellis. What type of platform system do you need that's mobile enough to be able to work with the bines? What type of harvester do you need? There's a specialty harvester for removing the cones from the bines. Then there is all the processing equipment, like the dryer and the pelletizing system.  Where do you get those? How much do they cost? Is there a market for used equipment?

What really helped a lot was other local farmers, not just in Pennsylvania, but also in Ohio and New York, where there's some burgeoning hop farming groups. They were extremely helpful, forthcoming with information, and cooperative with best practices. They were wonderful to work with. That's typical in the farming community in general, but because hops farming is so new, everyone was really willing to share best practices, tips, and things to avoid.

The other thing that was very helpful were organizations included in the ag extension services and the colleges of ag. At Michigan State University and Ohio State University, they have well-established programs directed at hop farmers. There's also a national organization that has started to look more at small hop farmers called USA Hops. That's the hop growers of America. They have a lot of resources there for folks like me who are starting a new endeavor.

The process is challenging, but there are resources out there that were available to me and to my partner to make sure that we were going in the right direction.

Teufel Hunden Hops Company is a young business that was only started a couple of years ago. What do you envision for the future? What do the next 5, 10, 15 years look like?

Pennsylvania is really growing in the craft brewing area. There are grants available from the state. As of 2020, Pennsylvania ranked third in the number of craft breweries with 444 and growing. Some people don't realize that Pennsylvania is second in the country as far as the economic impact of brewing, with over $5.5 billion in economic impact. That says a lot about the market for the ingredients for beer. It is lined up with our objective, which is to provide local ingredients to local brewers so that they can make fantastic beers.

I just happen to get the latest copy of Pittsburgh Magazine because we're in the Pittsburgh area, and the cover article is about the brewery boom. It doesn't look like it's going to end anytime soon.

With respect to your question about where we are headed with our business, in the short term we want to get quality local hops to our local craft brewers. In other words, we want to get our hops in their beers, see what they think, get their feedback, and ask questions to learn a lot more about what they want to see as far as the quality of hops, the chemical profile of hops, the flavor profiles of hops. The we can see what we can do to work together with them to produce hops that they want to use in their beers and refine our production and processing.

Insofar as midterm goals, we're really looking at establishing regular customers and working together with them to produce specialty brews that include just our hops. We want be known for being the local hop producer for local beers.

Long term, in 10 to 15 years, we are considering expanding the yard. Maybe we’ll add a few more varieties. We’d like to increase the number of plants we have of our current varieties, improving our processes, improving our product, improving our binding area, and getting our name out there as a recognized name for quality hops in the area.

An extended long-term goal that my brother in-law and I have been talking about is maybe even expanding beyond hops and into malt barley. Malt barley is not difficult to grow. It's one of those four ingredients that's needed in beer. Maybe that's another direction for our agricultural operations.

There's a lot ahead of us, but I am encouraged that we can get it done over the next years.

Can you share one piece of advice you have for someone who is interested in getting started farming or starting an agricultural business of any type?

I would have three pieces of advice. One is to plan. Make sure to plan ahead. When I say plan ahead, that means to not just plan for the next year or two, but to plan for 10 years or 15 years. Where do you want your operation to be? Where do you see yourself at that time?

Make sure to be realistic. What weakness are you facing? What challenges do you face? And don't downplay them. If you're not realistic, when face challenges, you're not going to be prepared to overcome them. Work within your means. When you're planning, make sure that you understand that you have limits to what you can do, and work within those means.

My second piece of advice is to persist. Be flexible in what you are doing, just in case you encounter some rough patches, but do not give up. If you put enough effort into planning and you put enough effort into a vision, then it's worthwhile. You should persist at it and not give up on it. If it's meaningful to you, go for it and keep going with it.

Finally, I'd say to listen. Keep your ears open for what other people have done. Even if it's not in exactly the same area that you're considering, you can pick up tips from all kinds of people in all areas if you keep your ears open and listen. That includes asking questions. Don't be afraid to be the one who asks a question. Who cares if it's been answered already? If you don't have the answer, then that's what matters. Don't be afraid to ask questions, and even reach out and ask for help if needed. Part of being successful is recognizing that you don't know certain things, so listening is an important piece of it.

As we wrap up here, could you tell our listeners where they can find you online to learn a bit more about your business and connect with you?
We have a website, which is teufelhundenhops.com, we also have a Facebook page and, of course, as everyone does, we have an Instagram. You'll recognize our logo. It has a dog with a hop bine over top of it and a big old hop. We welcome anyone to visit us.

I'm in charge of updating it, and my daughter also has a role to play in keeping it updated. We try to update it with pictures and information, but if it's not current, don't worry. We're still here. We still know it's out there, and we're still trying to get it updated. You're certainly welcome to visit us nonetheless on any of those platforms.

Devin, thanks so much for sharing your story with us here today, and congrats again on being one of our recent grant recipients.

Rachel, thanks very much for having me, and I just also want to say thanks so much to Horizon Farm Credit for your support and your interest in my operation, but also your support and interest in all young and beginning farmers. It really does mean a lot.

We recently interviewed Jim Hoge who shares about an exciting new program for Pennsylvania agriculture, called the Pennsylvania Agriculture Mentor Program.

Jim serves as a mentor for this program. The program includes five mentors with extensive agricultural backgrounds who assist beginning farmers, agribusiness entrepreneurs, and others in troubleshooting new strategies and ideas for their farm businesses. Spearheaded by a group of Pennsylvania agricultural organizations with an interest in the future of agriculture, the program leverages SCORE, a 501(c)(3) non-profit organization and resource partner of the United States Small Business Administration. The mentoring is free and confidential.

Could you tell us about yourself and your passion for agriculture?

I recently retired from Horizon Farm Credit after 34 years with the Farm Credit system. I spent 25 years as a loan officer working with large commercial ag businesses in dairy, timber, and grape industries. After those years as a loan officer, I transitioned to the Regional Manager for Western Pennsylvania. During that time, I led a lending team in three offices in Western PA and I was responsible for business development and credit decisions primarily. My passion for agriculture goes back to my college days. After I finished my B.S. in Dairy Science at Penn State, I worked with two of my brothers and we started a small dairy farm in Washington County. This experience gave me an understanding of the difficulties of startup businesses, especially in agriculture. The uncertainty of weather, crops, and marketing condition can add a new twist to startup businesses.

Throughout my career with Farm Credit, I worked with many startup businesses and learned what factors made some successful and others not successful. In 2013, before retiring from Farm Credit, my wife and I purchased a small farm near our home. Since then, I've been developing a small blueberry operation as a side hobby. We currently have 400 bushes and run a small pick your own business. We also sell to local farm markets. Agriculture has really been part of my day-to-day life for all my career, and I really enjoy working with the people involved in this industry. This is why I want to continue to stay involved in my retirement.

Why do you feel mentorship is so important for beginning farmers?

I understand how challenging it is to start a farm operation today. The capital involved in many different industries is high, so someone needs to come in with substantial equity or they need to take out loans to fund purchases to get started. Young and beginning farmers certainly have an advantage when they have a mentor that they're working with. The mentor is sometimes able to help them think of different things that they may not have thought of to avoid mistakes along the way. From my own experience, I know it's very helpful to have encouragement and someone to talk to along the way.

Jim, obviously you served as a loan officer for Farm Credit for many years, so in a lot of ways, this is a neat next step for you in retirement, to continue your role helping other in agriculture. What do you look forward to the most in serving as a mentor for others?

I’m not quite ready to kick back and not work, or not do much of anything in retirement. I have many years ahead that I want to be involved in agriculture. While I was at Farm Credit, I really enjoyed working directly with customers as a loan officer and as a regional manager. I worked mostly with large businesses later in my career, but I also worked with many small businesses and some beginning farmers. It was always exciting to work with folks that brought enthusiasm and new ideas to the table or to the industry. I'm looking forward to working with young and beginning farmers that are excited about developing an idea and starting or growing their business.

The new program utilizes SCORE to link the mentors to the mentees, and Jim, I know that you recently became certified through the SCORE program. However, many of our listeners may be unfamiliar with SCORE. Could you share with them a little bit more about the SCORE program?

I think this is a key part of the mentoring going forward. I was not familiar with SCORE myself until this venture. SCORE is the nation's largest network of volunteer expert business mentors, and SCORE is dedicated to helping small businesses get off the ground, grow, and achieve their goals. It's a nonprofit organization and it's a resource partner for the Small Businesses Administration, SBA. It is supported by SBA and the mentors that are SCORE certified have gone through training specific to SCORE. They are utilizing their experience in past business ventures and to serve as mentors for folks that are starting new ventures, or entrepreneurs that might be starting in a new business.

In your previous time with Farm Credit, you worked with a lot of beginning farmers. What advice do you have for someone looking to get started in agriculture?

The number one recommendation I have is to spend time and develop a business plan that is specific to what you plan to do. With that business plan, they're able to create a vision for what their enterprise is going to be, how the production will flow, what their marketing plan is going to be, and they can work on the financial projections of their business. This all is a plan, but without a plan, they really don't have much direction. Develop a business plan, complete that with specific ideas about production, financial projections, and the marketing aspects of what you’re producing.

Also, don't try to learn all aspects of the business at once. I would assume that anyone starting a new venture in agriculture already has an interest or some form of expertise in production for that industry. Taking that to the next level is going to take some experience and maybe some education but avoid trying to do all of that at once. Maybe learn the production while you're working on the business plan and take it step by step. I'd also recommend starting small. If you're able to start your business as a part-time venture and continue to work full-time, you have some added flexibility and insurance against any adversity that you might encounter along the way.

As we wrap up, feel free to share any other final tips or words of advice for our listeners here.

I would just encourage anyone out there that has a dream of getting started in agriculture or starting a new venture to follow it. Agriculture is the largest industry in Pennsylvania, and it certainly has a very bright future. Agriculture as we know it today is going to be much different in the years to come. There is plenty of room for new ideas, new ventures, and new businesses within the industry in Pennsylvania.

Individuals seeking mentorship can apply at www.score.org. Within the application, note your involvement in a food or farm business, and you may also identify a specific mentor, like Jim, that you would like to work with. To learn more about the Pennsylvania Agriculture Mentor Program and all of its mentors, visit pafarmlink.org/mentor. Organizations supporting the development and launch of the Pennsylvania Agriculture Mentor Program include Horizon Farm Credit, the Center for Dairy Excellence, Farm Progress and American Agriculturist, PASA Sustainable Agriculture, the Pennsylvania Department of Agriculture, Pennsylvania Farm Link, and Penn State Extension.

Approach every purchase-price negotiation with the same objective, cold, sober and analytical approach. The time to fall in love with a property is after departing from the settlement table.

This stance allows for a good business/investment decision, lessens or avoids buyers’ remorse and reduces the likelihood of over-paying.

Look at dozens of properties to overcome the potential emotion of the acquisition process. Gaining experience in the art of “walking away from unrealistic sellers” will make you more comfortable with timberland purchase-price negotiation.

Buy quality. Buy site index. Consider real estate tax rates. 

Seek areas with excellent timber species composition and high-quality timber fiber characteristics within key local species. Avoid properties overflowing with undesirable species or abundant defects. Reason: Excess time and money spent to rehabilitate prior owners’ mistakes will create a heavy financial burden that drives down return on investment.

Land (soil) with a high growing-site quality is better than low growing-site quality. A given soil’s “site index” is the average height of co-dominant and dominant trees of a given species, at a given “base age.” For example, “80 feet” is a terrific northern Pennsylvania “age 50 site index” (SI50) for northern red oak. A red oak 70 (SI50) soil is certainly respectable, but isn’t as strong as a red oak 80 (SI50) soil. Small differentials in site indices (between two otherwise comparable properties) will produce substantial differences in timber growth and yield over the course of a 110-year rotation – not to mention over the course of six generations of your family’s ownership!

Depending on a given woodland property’s state, county or municipality, annual combined county and school taxes can range from as low as $2.00/ac/yr all the way up to $31.00/ac/yr.Keep that tax burden in mind as you consider an offering price, otherwise the annual tax bill can eat all the potential investment returns.

Spend appropriate time and money on experienced, professional due diligence. 

None of us would seek discount dental care, or do-it-yourself surgery. Similarly, we want to avoid due-diligence short-cuts on a timberland property acquisition strategy. A good real estate attorney and a title policy are worth every penny before you invest your treasure in a woodland property. The counsel and cost of an experienced forestry professional can improve your timberland investment performance.

Prepare to spend money on proper site preparation, regeneration and pest protection.

Be ready to invest the money necessary to spray and manage cyclical or periodic insect infestations.Reason: A $45/ac, spray treatment is the right medicine to preserve a $1,875/ac oak timber crop which is nearing (but not quite at) financial maturity. Engage a forestry professional early in the ownership tenure. Plan two on-site inspections on your property each year, to detect and react quickly to insect events or wind, ice or fire damage.

The importance of regeneration: The best way to maximize growth per acre per year is to ensure full site occupancy by healthy vigorously-growing trees of desirable species. Open, un-regenerated forest areas can succumb to fern or diseased beech brush and leave your forest unhealthy and underperforming. The proper solution is to invest in regeneration, after considering several options that may include herbicide application or planting.

Please don’t fall prey to the suggestion to “cut the big trees and let the little ones grow.” Seek to keep the best-quality stems in the stand, and remove the smallest and lowest-potential stems first. Given our region’s history (vast forest-renewing clear-cuts between 1880 and 1910), a one stand’s small trees are the same age as its large trees. Within a given stand and species, the difference in stem diameter is a result of genetic potential and fitness – not a result of age.

Bonus: Seek out highly-stocked and larger properties. They generally offer a lower purchase price per acre. An analysis of historic woodland property transactions bears this out, and can allow a savvy investor to minimize the “dirt purchase price per acre”, which can help enhance returns over time.  If you’d like to discuss timberland ownership or a timberland price trend study in your area, call me, Rod or one of our experienced Horizon appraisal team members today.  We’d love a chance to help!

We recently interviewed Joel Semke, REAP coordinator for the Pennsylvania Department of Agriculture and State Conservation Commission.

Details on Pennsylvania’s 2020-21 Resource Enhancement and Protection (REAP) program were recently announced. Joel discussed REAP and program changes for this year.

Let’s begin with the basics of REAP. Could you share with us the background of REAP and how farmers utilize the program?
REAP was started back in 2007 and helps fund water quality conservation practices on Pennsylvania farms to reduce pollution runoff, including nitrogen, phosphorus and sediment runoff. Over the course of the past 13 years, more than 2,500 farmers across the state have been awarded REAP credits for a variety of conservation practices.

Farmers are reimbursed in the form of PA income tax credits, which are based on the cost of implementing those projects that reduce pollution runoff and also enhance farm productivity. The tax credits are used to pay the PA income taxes, dollar-for-dollar. Farmers have up to 15 years to use the tax credits from the date of issuance. So if you want to think about it like a debit account at the Department of Revenue, farmers draw on those credits to pay their PA income tax bill. Whatever they don't use one year rolls over to the following year.

Farmers can also sell those credits. They must wait one calendar year, but then they're allowed to sell whatever's left and turn it into cash. About 35 to 40% of farmers who use the program end up selling credits. 

REAP is a first-come, first-serve program. Farmers are not ranked based on geography or other factors, unlike some programs with NRCS or Chesapeake Bay. 

In order to be eligible for REAP, farmers must be in compliance with PA Clean Streams Law. That means having up-to-date Ag E&S (Erosion & Sediment) plans or conservation plans on all their acres. It means having up-to-date manure plans for their operation as well. If a farmer does not have these necessary plans completed, the cost of getting those plans is eligible for REAP credits at 75% of the cost. When REAP was established back in 2007, some of the primary goals were to increase compliance with Clean Streams Law by having these plans, in addition to increasing no-till farming, cover cropping and other important practices. 

Common practices that are eligible for REAP include no-till equipment (planters and drills), cover crops, waste storages, improved barn yards, precision ag equipment, stream practices and much more.

Farmers can apply for these projects after they're done or they can apply for projects that are proposed. If a farmer is thinking about buying a no-till planter next year, they can apply today. If they're eligible, credits will be reserved for those applicants and then awarded once the project is complete. 

Reimbursement rates range from 50% for equipment and cover crops to 75% for plans and projects that involve animal concentration areas (like an improved barnyard or streambank fencing) which are high priority practices for the state. 

One other important aspect of REAP that I want to mention is the program's ability to work in conjunction with other funding sources. Farmers are often very familiar with NRCS funding, the Chesapeake Bay Program or Growing Greener. They can use REAP in addition to those other programs. So for example, if a farmer has a big project on the farm such as a waste storage facility or barnyard improvement, they might be working with NRCS to fund those practices. Often NRCS will cover a good portion of that, but the farmer is still left with significant of out-of-pocket costs. Those farmers can apply to REAP and whittle down their final cost. 

Now that we have a basic understanding of REAP, could you share any specific details and changes to REAP for this upcoming year?
There have been a number of changes to the REAP program, mostly stemming from the PA Farm Bill that Governor Wolf signed in July 2019. Because of that initiative we have been able to revamp REAP and add some things that farmers had been asking for over the years. 

Some of the biggest changes include:

• The total amount of REAP funding was increased
• Farmers can use REAP credits on a jointly filed PA return for all income from the family farm
• The maximum amount of credits that a farmer or a farm operation can receive was raised 

For 2020, the commission implemented a 90% reimbursement rate for a select list of practices in any watershed with a TMDL. That might sound complicated, but really much of the state is covered by the Chesapeake Bay TMDL (Total Maximum Daily Load). In addition, there are smaller watersheds scattered throughout the state that have TMDLs too. Operations inside those watersheds are eligible for 90% credit on forested riparian buffers and buffer maintenance, livestock exclusion from streams and associated practices (such as stream crossings, fence, off-stream waterers) and soil health tests. It’s important to know that regardless of what watershed you are in, soil health tests qualify for up to 75% back.

This year, we also added some cover crop equipment to the list of eligible practices including spinners on the back of combines and roller/crimpers. Those are the new additions for 2020, but you can always look at our guidelines for the full list of everything that's available for REAP credits.

Is there anything else you’d like to share about REAP?

We're currently accepting applications. The application packet and a lot of other relevant information it can be found on the PA Department of Agriculture website. If farmers prefer a mailed copy of the application, please contact me at the contact information below. 

I manage the REAP program for the state, so if you have any questions I welcome you to contact me. Also, your local county conservation district is a great resource with the REAP program and can assist farmers with the application process.

Remember, REAP is first-come, first-serve. If you are interested in applying, do so sooner rather than later. I can’t accurately predict how long our funding for any given year is going to last. Typically, funding is available until December, but I can't guarantee that.  As discussed, you can apply for projects that you think you're going to do, not just projects that you just finished.

Please contact me at (717) 705-4032 or jsemke@pa.gov.

We recently interviewed Dan Brogdon, Horizon's resident PPP expert. On December 27, 2020 President Trump signed the latest COVID-relief act and government funding bill.

The legislation provides $900 billion in COVID-relief, including several programs to help farmers and agricultural businesses. The interview with Dan focused on the Paycheck Protection Program (PPP), including updates to the program and a second round of PPP that was part of the legislation.

There’s a lot included in the 5,593-page bill on COVID-relief. One of the biggest pieces of good news for the PPP program is the tax treatment of PPP expenses. Could you share with our listeners about that change and what it means for PPP borrowers?

Finally, Congress was able to set the record straight, and now we can deduct the expenses that you used your PPP loan funds for.

In November you might remember that IRS ruled the opposite. They essentially said, "Nope, you got tax-free money. You don't have to count it as income, but you cannot count the expenses." So, in effect, the proceeds were taxable.

The new act changed that, so that's great news. Now you can deduct the expenses and you do not have to include PPP forgiveness as income. If you received forgiveness or when you receive forgiveness, it won't be taxable.

Next, the legislation also simplifies the loan process for borrowers with PPP loans less than $150,000. Tell us more about that simplification.

For PPP borrowers with loans of $150,000 or less, when they apply for forgiveness, it will be a one-page application. The language says that has to be one page, so it shouldn’t be any longer than that. Also, borrowers will not have to submit any documentation.

I've heard some people refer to it as ‘automatic forgiveness’ for loans $150,000 or less. Well, it's not. You're attesting on that form that you used the funds appropriately, and you followed all the PPP rules, such as retaining employees and maintaining pay rates.

One thing that did survive with the new law is the safe harbors. Those safe harbors are cases where you had to reduce your staff due to being shut down, due to the government order. Or if you reduced your staff and then brought it back up to the previous level by a certain date, you won't be penalized on your forgiveness. Also included in that was, for the borrowers with loans of $50,000 or less, the FTE or salary reduction tests do not apply.

In summary, those with PPP loans of $150,000 or less will have to fill out a one-page application. They don't have to give the lender all the documentation they would have had to before. PPP borrowers are going to be very happy about that change, and Horizon is also happy that we don't have to review that paperwork.

The relief bill introduces a new “Draw 2” PPP loan. Dan, what does that Draw 2 loan entail, and who is eligible?

Anyone that received a Draw One PPP loan in 2020 is eligible to apply for a Draw Two PPP loan.

In order to be eligible, one of the big things is you must certify that due to the current economic conditions, funds are necessary to support your ongoing operations. That attestation is a key to your eligibility for the program.

The other big gatekeeper is that your gross income was reduced by 25% or greater in any calendar quarter of 2020, as compared to the comparable quarter of 2019. Or you could simply just look at the full year of 2020 versus the full year of 2019. The SBA already issued the rules and the procedures of the Draw Two program, and the application is available. As of today, only small community lenders are taking applications, but other institutions such as Farm Credit associations should have access to make Draw Two loans later this week or early next week.

So there you go, you have an opportunity for another PPP loan! If you are eligible, it will probably be a similar amount to your Draw One PPP loan because the formula is basically the same. The only exception is that you can choose to use either 2019 or 2020 payroll expenses when calculating your loan amount, if you qualify for Draw Two.

Again, the big key is the attestation that it's necessary to support ongoing operations. The other thing is the 25% drop in gross income comparing a quarter in 2020 to the comparable quarter in 2019.

There have been some changes that could impact borrowers of a Draw 1 PPP loan, for individuals that received a PPP loan last year. Could you help us understand who may have the opportunity to apply for an increase of their Draw 1 PPP loan?

This is another very exciting part of the new act! It only applies to those who received a Draw One PPP loan and have not yet received forgiveness, and if the borrower fits any of the rule changes that I outline. If you already received forgiveness, you would not be eligible.

The situations for potential Draw 1 increase include:

1. Sole proprietors only (partnerships and corporations don’t qualify): If you filed as a sole proprietor, you can use your 2019 gross Schedule F income instead of your net Schedule F income to calculate your eligible PPP loan amount. What this means is that farmers filing a Schedule F, sole proprietors could be eligible for a PPP loan increase of up to $20,833. Before you only qualified if you had a profit on your Schedule F. Now, if you had a net loss, you could qualify for that full $20,833, provided you have at least $100,000 of gross income. So you can have less than $100,000 of gross income and still qualify for an increase, but that's the maximum amount when we're looking at the calculation.

Another thing to add, anyone that has not received a Draw One PPP loan because they weren't eligible before, could now apply for a Draw One PPP loan. If you know of anybody that's in the circumstance that they didn't qualify because they didn't have a profit on their Schedule F to be able to qualify for a PPP loan, now they can apply and get their first PPP loan because of this gross income ruling. This is big and we'll be talking more about this, I'm sure.

2. Partnerships: Another situation where existing PPP borrowers can apply for an increase, if they haven't received forgiveness already, is partnerships. If you didn't include your K-1 net earnings from self-employment when you calculated your Draw One PPP loan, you can now include that and apply for an increase.
3. Seasonal employers: The third situation is seasonal employers. Make sure you qualify for the seasonal employer definition that has been released by SBA. You might be a seasonal employer if you have cyclical income or cyclical periods where you hire labor. You can choose from any 12-week period between February 15, 2019 and February 15, 2020 to calculate your maximum PPP loan amount. If that calculation yields a better result than what you had attained with your original PPP loan, you can apply for an increase.
4. New eligible payroll expenses: The fourth situation is all borrowers may include the payments they make towards employee fringe benefits, such as group life, dental, disability and vision. They can include those in the payroll expense and get it increased in their Draw One PPP loan. Originally the fringe benefits that were included were only retirement and health insurance, it was what the employer paid for the employee. Employer owners like sole proprietors, their health insurance and these fringe benefits don't count towards the PPP calculation. (Updated information: These new eligible payroll expenses won't alone qualify a borrower for a First Draw PPP loan increase. However, if the borrower qualifies based on other factors, they can take these new eligible payroll expenses into account).
5. Restaurants: The fifth reason for an increase is if you are a restaurant. You can apply for an increase if you did not include tips as wages when you calculated your original PPP loan.
6. You paid off your PPP loan prior to forgiveness: The sixth and final reason where you may qualify for an increase is if you paid off your PPP loan or you reduced the amount that you would have been eligible for, if you'd returned part of your PPP loan, you can now apply to get that reinstated. Either receive an increase or just a re-advance of that loan. The reason that they did that is there was a lot of confusion around about the necessity test and the safe harbor. SBA finally released that they weren't going to test loans under $2 million for that economic necessity test.

Those are the reasons that you can apply for an increase. We don't know what the process is, nor has the application for an increase been released. We'll be keeping our customers informed as to when they can apply for an increase. We do know that the deadline to apply for a PPP loan, a new Draw One, Draw Two, or an increase, is March 31, 2021. That's a lot to cover, but we'll be summarizing this on our website so you can review it there as well.

I understand there were some updates on the Economic Injury Disaster Loan (EIDL) program and also how EIDL interacts with PPP. Could you share with us those EIDL updates?

Another big change for the better is for anyone who received a EIDL loan advance. The advance was the initial amount up to $10,000. SBA had calculated that as $1,000 per employee, up to $10,000 maximum. The old rules had that reducing your PPP forgiveness. It was so that you couldn’t double dip. If you're were going to get your PPP loan forgiven and you got a $10,000 EIDL advance, SBA originally said they would reduce your forgiveness by $10,000.

The new act got rid of that reduction, so you're going to get your full PPP forgiveness that you're eligible for, and the EIDL advance will not impact your PPP forgiveness. So there's an extra up to $10,000 for folks that received EIDL advance, and they won't have to pay it back. The advance was never intended to be paid back, it's considered to be a grant.

The other thing is, SBA was applying that formula of $1,000 per employee up to $10,000. Well, Congress didn't like that. They thought everybody should have been treated equally, whether you're a big business or a small business. So the new act has SBA to digging back into the funds that they've appropriated for the program. If you received less than $10,000 for your EIDL advance, or you didn't get an advance when you have a loan or if you applied for a loan, you're going to get the difference between your original advance from that $10,000.

Again, there's been nothing released yet. Horizon does not administer EIDL loans. But if you did receive EIDL funds, we encourage you to check in with SBA.

The final thing I'm going to say about EIDL, is there is now a round two of EIDL. It has the provision for the advance, but the program is focused in on highly impacted businesses in low-income areas. There's about $20 billion allocated to this program, which, from what I've heard from other experts, they think that's going to be used up pretty quickly. It's going to be difficult to qualify, because businesses need to show a 30% gross revenue reduction from 2020, versus 2019. The test period is any eight-week period. For 2020 compared to a comparable eight-week period in 2019, you would need to show your revenue reduced by at least 30%.

The EIDL attestation, as far as economic necessity, is at a higher level from what I understand, as compared to the PPP program. You need attest that you essentially need this money to stay in business.

When it comes to the economic necessity attestation, whether it's PPP or EIDL, lenders can't really encourage or discourage anybody to apply. Or if you're going to go to SBA for an EIDL loan, the answer to that question is case-by-case. It's up to you, because we're not going to be evaluating that. You're the one that's answering that question and putting your integrity on the line.

If you're uncertain as to how to answer that question, we advise you to talk to your tax advisor, attorney or other financial consultants.

This is a lot to take in, but certainly some good opportunity for farmers and agricultural businesses to receive additional relief. What’s your recommended strategy on how existing PPP borrowers should approach these changes?

The big thing is, first determine whether you qualify for a Draw One increase before you look to apply for loan forgiveness. Information will be released within the next few weeks with the procedure on how to apply for your increase.

Once you've applied for that increase and received the increase, then I'd encourage you look at applying for forgiveness of your loan, using the $150,000 or less simplified forms. Or if you're above $150,000, you’ll follow that process which will be similar to what was previously in place. They've reduced some of the documentation retention requirements, but they might revise the form a little bit to account for the addition of the new fringe benefits that are allowed to be included in the PPP forgiveness calculation.

Again, to summarize: if you are an existing PPP borrower, first determine whether you qualify for PPP Draw One increase. Apply for that increase, attain that increase and then look to apply for forgiveness. You have until March 31 to apply for the increase. Then you have up to 10 months from the end of your cover period to apply for forgiveness.

Just as a reminder, your forgiveness covered period was up to 24 weeks from the day you received your PPP loan. Your covered period, always, always, always began on the day you received your PPP loan or the day that Horizon wired the money to you. The covered period ended between eight and 24 weeks from that date. So your deadline is 10 months from the end of that covered period.

Horizon supports its customers and community during this uncertain time by offering assistance and sharing important information that could be beneficial to you.

Below is an overview of federal and state programs that have been released in recent weeks. This list is not all inclusive, but it has many of the programs that Horizon feels will be of highest importance to our customers and partners.

2020 Recovery Rebates for Individuals (CARES Act; Title II; Section 2201): All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. Watch for these checks to be direct deposited to your bank account or hit your mailbox in the coming weeks.

Small Business Association (SBA) Paycheck Protection Program (PPP): SBA PPP provides $350 billion to help prevent workers from losing their jobs and support small businesses due to COVID-19 disruptions. The Paycheck Protection Program provides eight weeks of cash-flow assistance through federally guaranteed loans to small employers who maintain their payroll during this emergency. If the employer maintains its payroll, the portion of the loan used for covered payroll costs, mortgage interest, rent, and utilities would be forgiven. The proposal would be retroactive to February 15, 2020, to help bring workers already laid off back onto payrolls.

Eligibility details include:

• Employers with fewer than 500 employees
• Self-employed individuals
• Loans could equal up to 2.5 times an employer’s average monthly payroll, with a maximum of $10 million
• Covered payroll expenses include salary, wages, and cash tips up to an annual rate of $100,000 per employee, health insurance, retirement contributions, and covered leave. It excludes sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act (FFCRA)
• Rent or Lease agreement payments are eligible expenses, as are utilities, and interest on mortgages that were originated before February 15, 202
• Payments can be deferred for at least six months up to one year
• The loan period runs from February 15, 2020 through June 30, 2020

The borrower is eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on payroll costs, interest payment on any mortgage originated prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Amounts forgiven may not exceed the principal amount of the loan. Eligible payroll costs do not include compensation above $100,000 in wages per employee. The amount forgiven will be reduced proportionally by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation. To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that re-hire workers previously laid off will not be penalized for having a reduced payroll at the beginning of the period.

Upon a lender’s report of an expected loan forgiveness amount for a loan or pool of loans, the SBA will purchase such amount of the loan from the lender. Canceled indebtedness resulting from this section will not be included in the borrower’s taxable income.

SBA has determined that any loan amounts not forgiven at the end of one year is carried forward as an ongoing loan with a total term of two years at 1% interest.

Many details and regulations around this program are still being developed. Horizon will provide updates as more information is received and how Horizon can be a resource as a lender for this program.
SBA PPP Borrower Fact Sheet
SBA PPP Application

SBA Economic Injury Disaster Loans (EIDL): This program is open to small businesses, agribusinesses and farms which add value to their products. EIDL offers up to $2 million in assistance and can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing. These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. Program participants must not have the availability to obtain credit elsewhere.
SBA EIDL Program Facts

Modifications for net operating losses (CARES Act; Title II; Section 2303): The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

Families First Coronavirus Response Act (FFCRA) Leave Expansions

• Emergency Family and Medical Leave Expansion Act: Provides 12 weeks of job-protected paid leave for employees who are unable to work or telework so that they may care for children if schools are closed or their daycares are unavailable.
• Emergency Paid Sick Leave Act: Employers with fewer than 500 employees will be required to provide full-time employees with 10 days (80 hours) of paid sick leave when the employee cannot work or telework because they are quarantined or caring for others who are quarantined or if schools are closed. Part-time employees are entitled to the number of hours of paid sick time equal to the number of hours they work, on average, over a two-week period.

Emergency Family and Medical Leave Expansion Act and Paid Sick Leave Act Information

Pennsylvania Unemployment Compensation: Stay informed with unemployment compensation information.
PA Unemployment Compensation Benefits and COVID-19 FAQs

CARES Act Unemployment Information:

• Pandemic Unemployment Assistance (CARES Act; Title II; Section 2102): A temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.
• Emergency Increase in Unemployment Compensation Benefits (Cares Act; Title II, Section 2014): Provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.
• Pandemic Emergency Unemployment Compensation: Provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available. Pandemic Unemployment Assistance Information

Special Rules for Use of Retirement Funds (CARES Act; Title II; Section 2202): The provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020.

Exclusion for Certain Employer Payments of Student Loans (CARES Act: Title II; Section 2206): The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income.

Delay of payment of employer payroll taxes (CARES Act; Title II; Section 2302): The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. The deferred employment tax required to be paid over the following two years.

Employee retention credit for employers subject to closure due to COVID-19 (CARES Act; Title II, Section 2301): The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

Due to the impact COVID-19 has had on many businesses, program resources are being depleted quickly. At this time we know that Pennsylvania’s Working Capital Access Program offered through economic development organizations has reached its maximum and is now closed.

Dan Brogdon, lender development coach, recently reviewed the Small Business Administration’s Economic Injury Disaster Loan (EIDL) program on our Field Notes podcast.

Help our listeners understand the basics of the EIDL program. How is the program structured and who is eligible to apply?
The CARES Act expanded SBA’s longstanding EIDL program which assists businesses in regions affected by declared disasters. The first round of EIDL excluded production agriculture, but on May 4, SBA opened the EIDL application portal for agriculture producers only. Businesses with 500 or fewer employees are eligible to apply, as well as sole proprietors, independent contractors and most private non-profits.

EIDL offers loans up to $2 million to cover working capital at an interest rate of 3.75% on a 30-year term. These loans are offered directly through SBA. Payments on EIDL loans are deferred for one year and eligible applicants may also receive an emergency grant of up to $10,000 within three days of application. Emergency grants do not need to be repaid, and applicants do not need to have an approved EIDL loan to receive the grant.

While the EIDL loans seem attractive, they might not be a fit for every farm. Before signing for an EIDL loan, first talk with your lender or financial advisor. 

What should farms consider before applying for EIDL?
SBA EIDL is a program that may be useful for some farms, but there are implications that should be considered first. These items include:

• EIDL paperwork includes language about needing to obtain SBA concurrence before seeking a future advance on a senior secured credit line. It is unclear to what extent this will be enforced, but it may cause issues for farms if they have credit lines with other lenders besides SBA.
• Pledging collateral to SBA may impact your current lender’s ability to lend additional funds in the future.
• SBA consent is needed prior to any ownership transfers, so if your farm is planning an upcoming farm transition it may be impeded.

There are other impacts on EIDL are if your farm received a SBA Paycheck Protection Program (PPP) loan. The amount of your EIDL grant would be subtracted from the PPP forgiveness amount. You will also not be able to use EIDL proceeds for payroll, mortgage interest, utilities or rent since that is the intended purpose for PPP.

Are there any other thoughts you would like to share?
EIDL program is just another tool in your COVID-19 crisis toolbox. It is up to you to evaluate the details of the loan program and decide if this is the right fit for a financing tool for you and your operation. Having a conversation with your lender or financial advisor will help you make that decision.

We recently interviewed Kurt Beshore, loan officer with Horizon Farm Credit. Kurt discusses prepayment penalties, including what they are and how to avoid the hidden costs associated with them.

Let’s start with the basics. What is a prepayment penalty, and how does someone know if they have a prepayment penalty condition on their loan?
A prepayment penalty is a clause in the mortgage contract that states a penalty may be assessed by the lender if the borrower significantly pays down or pays off the mortgage before the term of the loan. 

Typically prepayment penalties occur during the beginning of the loan and also during a time where interest rate is fixed for a set period. There's typically a section in the note that the borrower signs that lists the clauses, and there's typically section in that, that spells out specifically what the prepayment penalty is, whether it's a percentage or fee in a set period of months that the prepayment penalty can be assessed.

If there is a prepayment penalty on their loan, what is important for the borrower to know? 
The two big things I'll discuss are the cost and the options that you have. 

First on cost – I’ll talk about three common approaches that we see to prepayment penalties:

• Step down: It starts as a 5% fee in the first year, 4% in the second year and so on until you get to 0% after the fifth year. Normally, that is in conjunction with a five-year fixed interest rate. 
• Percent balance: Typically, it's 2% of the principal balance of the loan. 
• Straight fee: We don’t see this very often, but it is a straight dollar amount associated with prepaying the loan early.

Now let’s talk about options for borrowers. There are a few options you have in terms of prepayment penalties:

• You can simply just ride out the current interest rate you have. It's not going to cost you anything to do that. I know you're going to be stuck there, but it's one of the options you have.
• Refinance with your existing lender. Sometimes they might be willing to waive or reduce the prepayment penalty. 
• Refinance with another bank. Run the numbers and make sure it's cost effective for you to do so. 
• Ask the lender you're refinancing way if they have any sort of creative solutions to help with the prepayment penalty. There could be options out there from other lenders who may be willing to help you through that situation.

Is there anything else you’d like to share with listeners on this topic? 
A prepayment penalty is a true cost to the borrower, so when you're considering interest rates and there is a prepayment penalty, there needs to be some sort of cost associated with that. Typically, we say it does add a premium to the rate just because it limits the flexibility that you have as a borrower if you're locked in on terms and rates. 

We don't know what the future holds, and the prepayment penalty could be a limiting factor for your borrowing capacity moving forward. When you are looking through your loan documents, if you have a prepayment penalty, make sure you fully understand it.

Know that you don't have to accept prepayment penalties. There are lenders out there who offer loans without prepayment penalties. You can ask your lender to exclude prepayment penalties. 

Understand the true cost of what the prepayment penalty does for you, and also understand that you have options to not include a prepayment penalty in your note.

No matter if you are a full- or part-time farmer, agricultural producers have a number of capital needs to make their operations successful.

At Horizon, we understand the ins and outs of farming and can offer you a variety of financing options and solutions to best meet those needs such as leases for agricultural necessities like vehicles, tractors, equipment (mobile or fixed), buildings, barns and more.

While often overlooked, leases can be a valuable option. A leasing company allows the use of equipment or machinery while you pay a periodic lease rental or payment. In essence, you only pay a usage fee for the equipment as it is used rather than pay interest on a loan.  Leases may provide tax advantages, little or no down payment and lower monthly payments.  When structured correctly, lease products can allow a customer an alternative capital pool to pull from while providing flexible and unique benefits.

Farm Credit Leasing Services Corp., funded by parent company CoBank, specializes in lease financing for the nation’s agricultural producers, agribusinesses and other rural businesses. Horizon Farm Credit is pleased to partner with Farm Credit Leasing to provide leases on a wide range of equipment and facilities, from new or used agricultural production equipment and irrigation systems to transportation and buildings. Horizon's partnership with CoBank and Farm Credit Leasing, provides professional guidance in structuring your lease, a necessity for receiving the full tax benefits of a lease. Horizon offers specification and pricing comparisons, volume purchasing discounts, equipment protection and selection assistance on transportation and material handling equipment.

Benefits of leasing with Horizon Farm Credit

• Financial Flexibility – Leasing can provide 100% financing, which allows you to preserve working capital and your operating line.
• Customized payment structures - Cash flow is improved with the possibility of lower payments and flexibility to schedule payments.
• Tax Benefits - Due to possibility of lease payments being fully tax deductible as a business expense on a properly structured true lease.
• Knowledge and Expertise – The Horizon Farm Credit leasing team, which includes decades of experience working with agricultural and rural businesses like yours, makes leasing easy. We learn your needs and customize a lease for your business.

Our team understands your business needs, our rates are competitive, and our terms are flexible.

So next time you are thinking loan or lease? Call Horizon to learn more about comprehensive leasing solutions that are available to you.

To learn more about Farm Credit Leasing solutions, please call your Horizon officer or visit www.farmcreditleasing.com.

We recently interviewed Joel Semke, REAP coordinator for the Pennsylvania Department of Agriculture and State Conservation Commission.

The Resource Enhancement and Protection program (REAP) allows farmers, landowners and businesses to earn tax credits for implementing Best Management Practices to enhance farm production and protect natural resources. The program has been in place since 2007 and has been an excellent resource for the agriculture community while protecting our air, land and water. Joel discussed REAP and common questions about the program.

Could you give a quick, high-level overview about REAP and how farmers utilize the REAP program?
REAP started in 2007 with a partnership between Chesapeake Bay Foundation and some other state agencies to help farmers fund water quality projects with the goal of reducing nitrogen, phosphorous and sediment runoff to local streams, and ultimately the Chesapeake Bay. 

REAP is a statewide program. Every year our funding covers about 350 applicants, so we have many people across the state applying and getting approved for REAP credits. 

Each year there is a $13 million annual allocation of income tax credits. The program reimburses farmers in PA state income tax credits, which they can use dollar-for-dollar to pay that PA income tax bill over the course of 15 years. The program has another option where farmers can sell them or transfer them to other members of the business, family members or other individuals. 

The program has been very sustainable. We use up all of our allocation each year, and it's proved very popular farmers, the PA legislature and others. 

Moving forward, we hope to continue to reach out and get new farmers into the program, especially with certain communities that don't use traditional funding programs.

When working with our Horizon customers, we often get questions related to the tax treatment of the REAP tax credits. Specifically, what happens when let’s say an LLC (which is treated tax-wise as a partnership), is awarded the credits?
REAP tax credits are awarded to either an individual social security number or an EIN for the business, which could be an LLC, a partnership, an S-corp, etc. Many of family farms are set up as a business such as an LLC, and we get lots of REAP applications in the form of an EIN. The tax credits are awarded to that EIN and then come tax time, they're passed through to the individual members of that entity, just like the income is. 

Farmers can use credits over the course of 15 years, so the 15-year carry over stays at the LLC level in this example. The credits stay sort of parked, so to speak, in that EIN account. Every year the business entity has to dictate to the Department of Revenue, how they're going to be passed through to the individual members and that happens on the PA REAP claim form. The first step is to figure out what the tax bills are going to be for the individual members, and then pass through that amount. The individual members can pay 100% of their PA income tax bill with the credit. 

I’m not an accountant, but I’m trying to provide a broad overview on some general concepts here. Farmers should always reach out to their accountant or financial advisors when discussing tax credits. 

As I was saying, the credits get passed down just like income. What happens if the individual members of that business entity have dramatically different tax bills? Let's say one member has their PA income tax ending up being zero. That could potentially impact how the other members can use the tax credits, because they're passed down according to membership stake. If somebody owes zero to the state, they can't have credits passed to them, and so then the other members will be impacted by that. 

In transferring or passing through any credits like this, those credits can't be rolled over. You can only pass down what a person can use for that tax year. That's very important to remember when you're talking to your accountants. 

Come April or March, I'm very glad that I'm not an accountant trying to deal with all those calculations. It is a factor that folks in LLCs, partnerships and S Corps need to remember when they're figuring out how much to pass through to individual members.

A key part of the program is that REAP tax credits may be sold to individuals or corporations wishing to reduce their tax liability by purchasing the tax credits. First, if a farmer is interested in transferring credits to other friends or family members, how does that work and are there any considerations to keep in mind?
Credits can be transferred down to other family members or friends, or whoever really. Or they can be sold. 

Two things have to happen first before a farmer can transfer or sell credits. First, the farmer or the primary recipient of this credit, needs to use that credit in the year that it's issued first. Even if you only owe $10, you need to use that credit to pay that $10. Then that frees you up for the second part where you need to wait one calendar year. 

For example, if a farmer in 2020 had a credit awarded sometime during the year in 2020, the 2020 tax year is the first time that they can use that. Right now they want to claim this credit to pay that 2020 bill, if they owe anything. If they don't owe anything, that requirement is waived, and you move on to the second requirement, which is to wait one calendar year.

Whether you're transferring it or selling it, you have to wait until the date of issue is on their credit plus one year, and then you can submit an application to sell it or transfer it. That application to sell it or transfer it is the same. When you're transferring it to a family member, you're just selling it to them for $0. 

It’s important for farmers to remember that the sale or transfer has to happen before December 31 of whatever tax year we're talking about. Therefore, farmers and family members need to do tax planning the year before. They’ll need to think ahead and figure out how much they're going to owe (or what they think they're going to owe). Then, they need to get that application to me prior to December 31. 

For the recipient of the transfer, they can only pay 75% of their PA tax bill with the credit so that's one further calculation that you need to do before you submit that application with the amount. Because again, if you transfer more than the person can use in any given year, that unfortunately is lost. There's no ability to roll that over for next year or put it back into the account of the primary recipient. The big thing is to plan ahead. 

I recommend that farmers get me those applications to me by December 1, because really that gives them a chance, if something goes wrong at Department of Revenue, they have a chance then to correct that issue and get it done prior to December 31.

Next, tell us more about the “sponsorship” option for tax credits. How does that process work, and are there any tips you have for farmers who may take this approach?
Sponsorship was included in 2007 with the original REAP law. It was envisioned as a way for businesses or other individuals to get involved with their local ag community to help farmers implement water quality conservation practices on their farms. 

The way it works is the sponsor is the applicant to REAP. The credits go to that sponsor for their input, and their funding that goes to the farmer. For the farmer, they submit the application based on their eligibility. The eligibility for REAP is based on the farmers' compliance with the law, but the sponsor is the applicant and the credits go right to that applicant. 

In the last two years we’ve had about 50 sponsors of REAP. There's really very little restriction on who can be a sponsor, and this could be an opportunity area for the future.

The only restriction is that that sponsor has to be liable to pay some sort of PA income tax. So any business, individual, trust or bank can act as a sponsor. The rules written right into law back in 2007 are intentionally vague about sponsors. A sponsor helps fund the project. There has to be a written financial agreement between the sponsor and the farmer. However, the state, myself and the State Conservation Commission, don't ever see that agreement.

It’s wide open what the farmer and sponsor agreed to in terms of details. It’s up to the farmer and the sponsor to determine how everything will work. A question might be if a sponsor going to fund things upfront and then receive the credits after the project is done? Or is the farmer going to take care of all the business, pay all the bills, and then the sponsor's going to reimburse them and get credits at that point? Again, it’s up to the agreement between the farmer and the sponsor.

The things that I need to see on a sponsorship application is just the check box that there is a financial agreement and then also addendum agreements to make sure that everybody understands who's responsible for maintaining that project. The farmer is the one that has to maintain it, even though they didn't get tax credits for it. Instead, they got cash. 

Let me clarify, the sponsor gets the tax credits. The tax credits can use them for up to 15 years, and they can carry them over year-to-year. 

For the farmer, they just see cash because of the involvement of the sponsor, which might be better for their current operation. It gives them a bit more flexibility in dealing with cash rather than PA REAP income tax credits. 

Another aspect of sponsorship that's beneficial to farmers is that there's no cap. When farmers apply on their own, there is a limit - a $250,000 credit limit that they can receive in any seven-year period. With sponsorship there is no cap.

When farmers are working on really big projects, such as a project that is $500,000 or more, sponsorship can be a great option because the sponsor can receive that entire amount as tax credits whereas if the farmer had applied on their own, it would be capped out at $250,000. 

Other key benefits are all the rights and privileges of getting that credit. The sponsor gets the 15-year carryover of that credit to use it. There's no cap. They can pay 100% of their tax bill with that credit, rather than in contrast to what I said about selling and transferring instead of that 75% rate that they could have if they bought the credits.

We've been working hard the last two years to try to ramp up the use of sponsorships, to make sure farmers are aware of it and understand it. It can help with the immediate cash flow of a farm's operation. The downside is the farmer gets cash from the sponsor, which is reportable income rather than a tax credit, which is not reportable income. Additionally, they don't have that flexibility of a tax credit over the course of 15 years. When a farmer receives cash, that's all in one year, and one time to deal with all the bills and whatnot. Whereas with a tax credit over the course of 15 years, a farmer could use that for unforeseen circumstances. In certain years where you sell a lot or the economy is great, the tax credit can be very useful in those years. 

Another concern to consider is that farmers are not always fully in control of the timing because the credit is issued after Department of Revenue does a compliance check on that sponsor, which you, as a farmer, you can't control the tax compliance status of the business down the street.

However, in general, the 50+ farmers that have used this process over the last few years have generally been pleased with it and feel that more farmers across the state could take more advantage of. 

If you have questions or concerns, or want additional details, please reach out to me. I can help answer questions as best I can.

What other common questions do you get from farmers about REAP?
We’re in the midst of tax season, so one common question I get is about claiming credits. 

We have about 300 to 350 farmers that use the program every year, so while it can seem daunting at first, many farmers are getting good at using tax credits. At this point, the state has awarded almost $105 million worth of tax credits to farmers all across the state. About 60% of those credits are being used year-to-year on PA income tax returns. I say that to encourage farmers. It might seem like a daunting process at first, but plenty of people are doing it. Also, man accountants around the state are getting used to the system, so it can be done. 

This time of year, claiming this credit is really a two-part process for the paperwork. The first step is figure out how much you owe on your PA income tax. The second part is to fill out the REAP claim form with that amount. You figure out how much you owe and then you claim it on the REAP claim form, which gets faxed to the number at the bottom of that form.

This is a key misstep. The claim form has to be submitted to a separate address. If you don't do both parts of this process, that can hinder the use of these credits.

To wrap it up, know that there are many farmers who are taking advantage of this program. Accountants are certainly getting more familiar with REAP, and I’m here to help too. 

We will accept fiscal year 2020 applications until March 1. Our funding for this fiscal year is almost gone, but there is no harm in submitting an application. If you're hearing this and you have a project in mind, please submit an application. If we don't have funds for you, you just get rolled over to next summer, 2021 summer, for our next pot of funding. You don't have to resubmit new paperwork or anything like that. If you have something in mind, please apply.

Are there any thoughts you would like to share with our listeners today?
I'm always happy to hear from farmers and help them learn more about REAP. Feel free to call me at 717-705-4032 or email jsemke@pa.gov.