by Bobby Medlin, CPA
Bobby Medlin CPA is the founder of Bobby Medlin CPA Group, an organization committed to providing strategic tax, business, financial, and accounting services and advice to Agribusinesses and their owners.
2021 promises to be an interesting time in the agriculture tax world. In the last year or so, tax law changes have been included in:
The SECURE Act – (Dec 2019)
The FFCRA – (March 2020)
The CARES Act – (March 2020)
The PPPFA – (June 2020)
The CAA – (December 2020)
What does this all mean for the Ag producer? You need to seek the advice of professionals who understand Ag production as well as income taxes. Many provisions apply to various sectors of the US economy including agriculture.
If we tried to include everything here, it would take a few trucks to deliver the 10,000 or so pages to your mailboxes. Instead, here are the top ten things you need to know as an Ag producer in early 2021:
Paycheck Protection Program (PPP) loans may have just become available to you.
The CAA expanded PPP loan availability to Schedule F farmers who did not already receive the maximum $20,833 per owner. If you did not receive a PPP loan, or have received a PPP loan and do not have it forgiven yet, you may still be eligible for more relief. The CAA allows you to use gross receipts on Schedule F to calculate your loan amount, regardless of your profit or loss. You have until March 31, 2021, to apply at a bank for the increased benefit.
PPP 2nd draw loans could be available to your operation. If your operation experience a 25% or more decrease in revenues during any quarter of 2020 as compared to the same quarter in 2019, you are eligible for a 2nd draw PPP loan. This is a different loan that your first PPP loan and is available once you have received forgiveness of your first PPP loan. You have until March 31, 2021, to apply. If you have not received a first PPP loan, see # 1 above.
PPP loan forgiveness is tax free – in the CARES Act Congress specified the forgiveness would not be taxable. It didn’t take long for IRS to say “Not so fast!” Buried in tax regulations is a provision whereby expenses paid for with tax-free income are not deductible, in effect creating a tax hit for the PPP borrower. It took until the last week of December for Congress to pass legislation in the CAA making an exception for PPP loan forgiveness. The expenses you pay to obtain PPP loan forgiveness are now deductible.
Economic Injury Disaster Loan (EIDL) advances up to $10,000 no longer must be subtracted from your PPP loan advance (or your PPP loan forgiveness if you had already obtained a PPP loan when you received your EIDL advance). SBA has been instructed to create procedures to make you whole if your EIDL advance has already reduced the benefit of your PPP loan. See your PPP lender for more information.
Family Leave Credit – may apply to you, even if you do not have employees. For 2020 and part of 2021, there are credits for employers and self-employed individuals to help offset the cost of required paid leave related to COVID-19. The credit for farmers and ranchers, and other self-employed individuals, for their own leave will be claimed on the 2020 and 2021 income tax returns. Credit for leave you were required to pay to employees will be claimed on Form 941 or Form 943. More information about the credits and the paid leave is on the summary at https://www.dol.gov/sites/dolgov/files/WHD/posters/FFCRA_Poster_WH1422_Non-Federal.pdf
Employee Retention Credits (ERCs) may be available for your operation. As contained in the CARES Act, beginning March 12, 2020, an eligible employer can receive a credit of up to 50% of the first $10,000 in wages paid to nonfamily member employees during the period from March 12 to December 31, 2020. Initially, a recipient of a PPP loan was ineligible for an ERC. The CAA in late December, removed this restriction. If you are otherwise eligible for an ERC, having a PPP loan will not make you ineligible for an ERC.
Furthermore, the CAA expanded the ERC through June 30, 2021, and increased the credit to 70% of wages paid to each nonfamily member employer per quarter for the first and second quarters of 2021.
So what makes you eligible? There are two ways to become eligible for an ERC. You must have a decrease in revenues in a quarter of 2020 as compared to the same quarter in 2019. Do the comparison on a quarter by quarter basis. Once eligible, you are eligible through the quarter in 2020 in which your revenues reach 80% of the revenues in the same quarter of 2019.
For 2021, eligibility is reached by having a 20% decrease in revenue in a quarter of 2021 as compared to a quarter in 2019.
The other way to become eligible for an ERC is if your business was the subject of a government-mandated shutdown or partial shutdown. If this was the case, wages paid during the shutdown order are eligible to be used to receive an ERC. As of publication date of this newsletter, we are awaiting updated IRS guidance for more information. See https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act for the latest information.
ERCs are claimed on Forms 941 or Form 943 and can be claimed on an amended Form 941 or Form 943.
Coronavirus Food Assistance Program (CFAP) payments are considered a disaster payment under Missouri tax law and are allowed as an Ag Disaster subtraction on your Missouri income tax return. This will eliminate Missouri income tax for 2020 for many producers. More information can be found at https://dor.mo.gov/faq/personal/agricultural_disaster.php
Child Tax Credit & Earned Income Credit (CTC & EIC) for 2020 can be calculated using 2019 earned income, if your 2019 earned income is higher than your 2020 earned income. The CTC and EIC can amount to more than five figures of tax refunds for farmers, ranchers, and other self-employed individuals with certain levels of income. On your 2020 tax return, you will want to compare your CTC and EIC for 2020 using 2020 earned income with your CTC and EIC using 2019 earned income.
Changes to Individual Retirement Accounts (IRAs) – beginning for the 2020 tax year, individuals otherwise eligible to make IRA or Roth IRA contributions will not be prohibited from making the contributions solely because of obtaining age 70 & ½. If you have enough earned income and aren’t otherwise restricted from making contributions due to income levels, age is no longer a factor for determining contributions to make.
Beginning with individuals who reach age 70 & ½ during 2020 and in future years, you no longer have to take Required Minimum Distributions (RMDs) from your traditional IRAs until April 1st of the year after you reach age 72. Keep in mind if you wait until the year after you reach age 72 and take that first RMD from your IRA by April 1, you will still be required to take the next RMD by December 31 of that same year, which would double up income from IRA distributions that first year. However, Qualified Charitable Distributions (QCDS) of up to $100,000 per year can still begin on the date you reach age 70 & ½. If you have not used a QCD, and are charitable minded, you should ask your tax professional for more information.
50% limit on Business Meal Deduction is suspended for meals provided by restaurants in 2021 and 2022. Code Section 274(n)(2) provides some exceptions to the 50% limit on business meals deductions, however the CAA creates another exception. Food and beverages purchased from a restaurant for business purposes in 2021 and 2022 are now fully deductible. There is no requirement the food or beverage be consumed in a restaurant to be fully deductible. Be sure to record the business purpose for the meals and who you were with in order to secure the deduction. And consider buying from the local restaurant rather than the grocery store when providing meals for farm employees, farm business, and associates.