SBA PPP: What Farmers Need to Know

We recently interviewed Dan Brogdon, a PPP expert, about the recent COVID-relief legislation which passed on December 27, 2020. Dan reviewed the changes to the Paycheck Protection Program (PPP) and how certain farms or individuals may now qualify for the program.

Let's begin helping us understand what key changes to PPP were introduced that makes the program more open to those who might not have applied last year.
The biggest change is that sole proprietor farmers or anybody that files a Schedule F as sole proprietor on an IRS 1040 is eligible to use their gross Schedule F income. Previously, sole proprietor farmers had to use the net profit from Schedule F. 

So what's this mean? If you had a Schedule F loss in 2019, you previously weren't eligible for a PPP loan. However, now you can be eligible for a First Draw PPP loan based on your gross farm income. There's a potential of obtaining up to $20,833 maximum loan, since the gross income's cut off is $100,000 and the formula would yield a $20,833 PPP loan.

However, you don't need to have $100,000 in gross income. Anybody that's a sole proprietor that files a Schedule F with any amount of gross income could qualify. You could be a full-time farmer that has lots of gross farm income, or you could even be more of a lifestyle or a part-time farmer and qualify.

In order to qualify for any PPP loans that I'm going to be talking about today, you must certify, amongst other things, that the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant. It’s really up to you to make that determination, and if you're uncertain, you can always contact a financial adviser, such as a tax accountant, attorney or financial consultant.

In summary, the greatest change to the agricultural industry is the allowance of the gross farm income. Sole proprietor farmers who didn't qualify in the past may now qualify. 

I’ll also add, anyone that's in a partnership who didn't use their K-1 net earnings from self-employment, may now qualify for a PPP loan as well.

For individuals that already received a First Draw PPP loan back in 2020, what options are now available given the new COVID Relief Act?
Again, the biggest thing is this being able to use gross farm income to determine the PPP loan amount. Even if you had already obtained a PPP loan, you may apply for an increase in it. We call that a First Draw Increase, and you may use your gross Schedule F income if you're a sole proprietor.

In the case where you have a PPP loan because you have labor and you had a net Schedule F loss as a sole proprietor, now you may use your gross Schedule F income. You will have to reduce that gross Schedule F income by your labor-related expenses, but in many cases, it will be easy to yield the maximum allowable gross from income of a $100,000 which would result in a $20,833 First Draw Increase.

Other farmers who had a net Schedule F profit or less than $100,000 will also benefit from this new rule, because they'll be able to make that eligible amount up to $100,000.

Let me give you a quick example:
If a farmer had a $50,000 Schedule F profit, that would've added about $10,400 for their PPP loan. With the new rule, since the gross farm income will yield the higher amount for sole proprietor, they would qualify for that full $20,833 as a result of their Schedule F income if they're a sole proprietor, so that means they would receive an increase of about $10,400..

There are a couple other cases where you can receive a First Draw Increase, such as if you didn't use your K-1 net earnings from self-employment as a partnership.

Or if you're a seasonal employer (and there's a specific test for seasonal employer), you may use the highest 12-weeks of payroll between February 15, 2019 and February 15, 2020. You would annualize that 12 weeks' worth of payroll, and then use that to determine your PPP loan. So basically, the formula is still the same. It's 20.833% of your annual eligible payroll.

Those are the three cases where you may be able to obtain a PPP loan increase. 

Once you've received your increase, then you may then consider a Second Draw PPP loan. Requirements for the Second Draw PPP loan also include that you must show that you had at least a 25% reduction in gross revenue in any quarter of 2020 compared to the similar quarter of 2019, or for the entire year of 2020 versus 2019. Like a First Draw PPP loan, you will also need to certify that the current economic uncertainty makes the loan request necessary to support your ongoing operations of you. Again, the gatekeeper for a Second Draw PPP loan is the 25% reduction in gross revenue.

In many cases, the amount you could qualify for in a Second Draw loan could be the exact same amount as you qualified for in the First Draw loan plus any increases. Second Draw loans allow you to use 2019 or 2020 payroll to determine your loan amount.

With the new changes and the opportunities to qualify for some of this additional PPP funding, when do you think a borrower should apply for loan forgiveness?
Borrowers need to remember to wait to apply for forgiveness until they’ve received any First Draw increases. The reason is because once a borrower received forgiveness, they’re not going to be eligible for any increases. 

At this point, we're not sure if there might be any additional rule changes that would qualify more increases, but who knows? We’ve seen the PPP program rules change before.

If you're afraid that you might miss out on any rule changes that might entitle you for more increases, you might want to wait until the end of March to apply for your PPP forgiveness.

What else is important for our listeners to know about the PPP?  
If you didn't receive a PPP loan in 2020, consider applying for your First Draw PPP loan if you qualify.

If you have an existing PPP loan and you meet the criteria for an increase as I outlined earlier, apply for your increase. Once you've obtained an increase and you're done with your First Draw loan, then take a look at a Second Draw loan. You will need to certify that you've obtained your First Draw loan and used your funding and increases by the time you obtained your Second Draw loan. Then once you've considered the Second Draw loan and determined whether or not you're eligible, think about when you want to apply for forgiveness and have a strategy in mind.

Horizon will  keep its PPP borrowers up-to-date on any program changes and considerations for forgiveness. There's a new, simplified loan forgiveness process for loans $150,000 or less which includes a one-page form. Listen to our January 12 podcast for further details on loan forgiveness. 

If you're interested in any of these items I talked about today, the First Draw increase, a new First Draw loan, or a Second Draw loan, contact us at Horizon and we’ll help guide you through that process.