MSU Extension Agriculture

 So hi everyone. Mike Metzger already introduced himself a little bit. I'm Corey Clark. We're both Michigan State University Extension Educators. I am a Farm Business Management Educator. So I work on a variety of farm business management type issues: business planning, financial analysis, and right now spending a lot of time with taxes. So that's part of the presentation tonight. Mike, you want to  introduce yourself? Sure. As I said, my name's Mike Metzger. I work with small ruminant producers across the state, all 83 counties. And, because some of my producers are now eligible for FSA programs that haven't been in the past, we thought that this would be a good idea to put this on for some of our non-traditional commodities. Ok, so that's our basic plan. Our plan of attack is that I'll spend a couple of minutes explaining what we mean by the coronavirus relief programs and kind of what what our agenda is here. And then we'll talk in more depth about the CFAP 2 Program, which is one of the ones that is still open and available to a wide variety of non-traditional commodities. And then Mike will talk about applying for the CFAP 2 Program, and finally, I'll talk about some of the tax implications of the relief programs, and some things that can help you manage your taxes, plan your taxes, and some of the things that's required of you guys as employers. So getting started, the overview of relief programs. Okay, so there are two main pieces of legislation that created all these coronavirus relief programs. Both passed in March and they'd been adjusted since then. The first one gets a lot of air time. That's the CARES Act: the Coronavirus Aid Relief and Economic Securities Act. And that was the one that created the first stimulus check and created all of the programs to support small businesses, including agricultural businesses, who were all struggling, of course, due to the COVID-19 pandemic. And so some programs were specifically targeted towards farms and agricultural businesses. And some were opened up to agricultural businesses to participate in. So there were direct payment programs, loan programs, and tax credits. And those are the ones, that's what we'll talk about here. And then also the Families First Coronavirus Response Act, the FFCRA Act, was the one that created rules for paid employee leave as it relates to COVID-19. And that also created the tax credits to cover some of the costs associated with those leave programs. So we're going to attack this in three parts, the direct payment programs, the loan programs and the tax credits. And first, of course, direct payment programs. So this is the ones of course, that provide payments directly to business owners to help offset some of the losses from the COVID-19 pandemic. There was the individual stimulus check, or the economic impact payment, and that went to individuals. But then there's the business programs like the Coronavirus Food Assistance Program, which is CFAP.  There was CFAP 1 and CFAP 2. And CFAP 2 is the one that will get some extra air time here tonight. And that one's still available for sign up. And then on top of the federal programs, the state of Michigan created agricultural safety grants to support farms and ag processors in protecting their employees in the food production from coronavirus. And then the loan programs. This is the Paycheck Protection Program, PPP, and the Economic Injury Disaster Loan Program, EIDL. Both of these programs are run by the Small Business Administration and they are very different programs. Both of them still have provisions that are still operating. The PPP, those loans are in the process of going through the forgiveness process. And EIDL loans are still available although the advances from earlier in the year are not. And again, we'll talk about that in painful more detail. And then the tax credits, the FFCRA Leave tax credits to support employer paid sick leave as it relates to employees that have been impacted by COVID-19 and directly and through needing child care, needing to provide childcare for school and child care closures. And finally, whoa, let's try this again. Okay. Finally, the employee retention tax credit, which it kind of  catches the businesses that were impacted by COVID-19 related shutdowns, but did not necessarily get to participate in the other programs. So just laying out what the programs were here, and then we'll come back to the tax implication, a little more detail on the tax implications. So for now, I want to shift our focus to the CFAP programs in particular CFAP 2. First just noticing that CFAP 1 was earlier in the year and applied to like 40 or 50 commodities, mostly traditional commodities. And then I think 40 or so specialty crops that experienced price declines or for marketing losses and additional costs from January to April. And this one ended in September. But the idea was if producers or growers experienced 5% or more price declines or had produce shifts, but then spoiled or had crops that remained unharvested, it provided some payments for those. Whereas CFAP 2 is far more expansive. It includes like more than 200 commodities. And it's based more around production or expected production. Kind of trying to encompass an estimate of 2020. And it split these commodities into three categories. There is the price trigger commodities, the flat rate commodities, and the sales commodities. And one of the things that's important about this is this sign up for this program is still going and does not end until December 11th. Okay, so long list of commodities, Mike will go into some more detail, but there's fruits, vegetables, tree nuts, horticulture, floriculture. And I'll show you a list in the next few slides of each of the types of commodities. The price trigger commodities are mostly the traditional commodities, especially row crops and some like dairy, cow milk, and some livestock. That payment is triggered by a decline in the national price. Flat rate commodities, which is kind of an assortment of other row crops that don't have such national prices and they get a flat rate per acre. And then sales commodities, which is where most of the non traditional commodities would fit. And  that payment is a percentage of sales. So a walk-through of the three types, you know, fairly, fairly quickly because the price trigger commodities again, tend to be the traditional commodities with national prices. that can be measured for this trigger, which is if the price declined more than 5% between January and July. Row crops, sunflowers, cow milk, your basic standard livestock, and then broilers and eggs. So payments are basically based on calculations of what would be expected sales. So like crops, for example, is calculated on their reported acreage and then times the production history and the portion, the set percentage of crop that would be sold in a year times a payment rate per bushel or, for sunflowers, per pound. Livestock is based on an inventory at a selected time, like, between April and August times a payment rate per head. And cow milk is a combination of actual production from earlier in the year. And they use that to estimate production for the rest of the year times a payment rate per 100 weight. And the broilers and eggs, use some adjustments to 2019 production to calculate theirs. So these are more, these are kind of commodities with national prices that can be, can be worked with, customized, tailoring the payments to the individual farm. In contrast to flat rate commodities, which the payment is a much more straightforward rate. It's a flat rate payment of $15 per acre. And so as you might notice, these are more like forges and row crops that don't have those widely available prices. And so they're taking kind of a broad stroke expected production using a fixed payment per acre. And then finally sales commodities. And as I mentioned, this one is the one that captures the broadest range of commodities. There's a list over here on the side, and there's a lot of like, you know, general categories. Like vegetables, for example, lots of different vegetables. So these have a wide variety of units of production and none of them have widely available prices. So instead of trying to get a handle on expected production they're using a percentage of 2019 sales. The way that works is that the first portion of 2019 sales has a 10.6% payment. So payment of like 10.6% of the first I think $50 thousand and then 9-something percent of the next few $100 thousand of sales. And then 8.8% of sales over $1 million. And I'm going to turn it over to Mike here to talk about CFAP 2 in more detail. OK, let me figure out how to share the correct screen here and put that into presenter mode. Slideshow. There we go. So Corey mentioned some of this a little bit. You can see my screen right Corey? Yes, sorry. So Corey mentioned some of these commodities. I'm going to talk a little bit more about them. And then I'll talk about the application process some. So row crops she mentioned there's a long list of row crops here. Wool, livestock, traditional livestock, beef, cattle, hogs and pigs, lambs and sheep. Of course, breeding stock is not eligible. And we get into some of the specialty livestock. This consists of animals commercially raised for food, for fiber or feathers. There's a big lists there. There's some that you wouldn't expect to see there, but they're there. Cow milk and goat milk. Cow milk again is done on the national price decline. Goat milk is done as a sale. A percentage of sales, There are more than 230 fruit, vegetable, horticulture and tree nut commodities. Along with honey, maple sap, and indigo. You can visit the CFAP website and look at specialty crops for the full list of eligible commodities. Floriculture, cut flowers, and cut greenery from annual or perennial flowering plants grown in a container or a controlled environment for commercial sale. Nursery crops, decorative or non-decorative plants grown in the container or controlled environment for commercial sale. Cactus and Christmas trees. Again, you can go to the website for more information. Aquaculture, food for human consumption, fish raised as feed for fish that are consumed by humans or ornamental fish propagated and reared for an aquatic medium. More information again on the website, And then again broilers and eggs, which are commodities grown under contract in which the grower has ownership and production risk. So one of the things I didn't mention in my introduction is that on top of working for extension, I also have a commercial goat dairy, and an on-farm creamery. So one of the examples I'm going to use here will be my farm. So what do you need? What kind of records do you need? You need gross sales in dollars. That cannot include any value added or marketing expenses. So if you grow apples, but you sell apple pies, you can use the value of the apples, but you cannot use the value of the pies. And it has to be the market value of the apples. So what is the market value of apples is up for discussion. But if you can prove the price, from when I talked to the director of the office here in Ingham County, she's like "it ultimately goes to the county committee." So that's who you have to prove it to. She said you can use your schedule F numbers. If you have sales receipts, if you have ledgers, deposit slips, or production records, like I said, ultimately it goes to the county committee to decide if there's an audit by FSA. So Corey talked a little bit about this payment calculation. So on the sales approach, it's 2019 gross sales for the eligible commodity. Like I said, it has to be the raw commodity. And the payments are based on five percentage ranges. So as you can see in the table, 0 to $49,999 is 10.6%. The next $50 thousand to $99,999 is at 9.9%, and so on down the scale. And it's an adequate scale. So if you're, you know, somewhere around a $100 thousand, a little over a $100 thousand, you're going to get three different percentage points on how it's paid. Again, those commodities include the specialty crops, the aquaculture, the livestock that is not included under price trigger, tobacco, goat milk, mink,  including pelts, mohair, wool in nursery, and floriculture crops. So here's my example. So what does my farm have that's eligible commodities? So we sell goat milk to another creamery, I have receipts for that. We use our own milk in  our own creamery, And so I have to find, to figure out the value of that milk. I know how much milk went through my pasteurizer, and I know what I sell milk to the other creamery for. So it's a simple matter of going a little bit of math and we can do that that way. And then for my goat meat, I use receipts from the option. Now when I did my goat meat, I didn't quite do it correctly because I used a net receipt instead of gross receipt because there is commission, and yardage and things like that that is taken off at the Manchester, the UPI auction house in Manchester. So the other thing that you need to know is that I was in the FSA system because I got some money back for a program in 2008 when, hay prices went really high. I think it was 2008, 2007 or 2008. So forms I had to fill out the CC 902, and I'll talk about all these individually in a minute. The CCC 941, the AD 1026, and the AD 3117. Oh, and I also had to fill out a form to change my bank information. Now, everything I did was done electronically. I never went into the office. She emailed me forms, I filled them out, printed them off, filled them out, signed them, scanned them, sent them back, and the whole process took less than a week. So here is the AD 3117, which is the Coronavirus Food Assistance Program 2 application. The application itself on this particular page, page one, because of my commodities, I had to fill in part B, which is the name, address, and phone number of the producer. He did nothing else on this form, on this side, they filled out the top corner.  On page two, in column 19, my dollars for goat milk sales went in the miscellaneous column here. And my goat meat sales went into this other livestock column. And then of course I had to sign owner and date and then send it back to them.  On this 941, box 2, name and address. Box 3, taxpayer identification, either your IR identification number, or your social security number, depending on how you're doing business. Box 5 certifies that your adjusted gross income is more or less than $900 thousand. And then sign at box 6, box 7 owner again and dated. And next one, the 1026, she had it highlighted for me when she sent it to me. Again, the name of the producer, the last four digits of the tax identification number. Any other person,  box 4 there, that has a farming interest in the farm,  so if it's a partnership. And then I had to answer these questions about highly erodible land and things like that. During the crop year entered in part A for the term requested, did the producer in part A plant or produce part of agriculture commodity on land, that was highly erodible?  Answer was no. Has  anyone performed, since December 23rd, 1985, or will they perform will they create any new drainage? No.  Improve or modify existing drainage? No.  And maintain any existing drainage? The answer was No there. And then they use that information on this next form, the 902, which she sent back to me with my responses. They came from somewhere. I don't know. I had to tell him I was a citizen somewhere in that type of thing. Again, sign, owner and date. And about a week later, the money showed up in my account. So it was really a relatively easy process. Again, all done electronically. I never had to go into the office. And with that, I'll turn it back over to Corey to take over on more of the taxes. Okay. So tax implications, Buckle up. There's  a lot of stuff and I think probably a lot of you are like already familiar with the programs because you're involved with them or do some of the taxes yourself and are familiar with them. And maybe some people aren't as familiar with the program. So I've tried to kind of take us as far as I can get us in 15 or 20 minutes. In the information without, you know, trying to put you guys to sleep. We're going to tackle them in the same order that I was discussing them, that I've kinda brought up the original sets of programs, When I originally discussed it. CFAP direct payments, CFAP1 and CFAP2. And then the Michigan Ag safety grants, The loan programs, we'll spend some time with these because the tax implications and managing through the programs of handling the tax implications gets a little, a little complicated, and it's also evolving and developing, still, in terms of tax guidance. And then the tax credits, those will obviously also impact 2020 taxes and are still going on. So starting with direct payment programs, you know, there's a few of them. There's the CFAP 1, CFAP 2, and  Michigan Ag safety grants. And honestly they're the most straightforward ones. They're all part of gross income on Schedule F, they're all part of government payments. As an aside, the economic impact payment, the individual stimulus check, the application deadline just passed for that. But a lot people received them earlier in the year. That is actually not taxable to the individual, like a whole different issue, but not taxable. Whereas the direct payments to the businesses, those are taxable as gross business income for government program payments. Okay. And then the loan programs again, paycheck protection, PPP and economic injury, disaster loan, EIDL. They are both small business administration programs, but they are totally different programs. They're administered differently. Their intentions were different, the benefits are different and the tax implications are different. And on top of that they interact the two of them together. So we'll go we'll go through that. Okay. Paycheck Protection Program, small business administration program, just like I was saying, but it's administered by lending institutions. So banks, farm credits. And this ends up mattering because the, the loan is forgivable if the funds are used in particular proportions basically. And the loan is forgivable by the actual lending institution after it's approved by the Small Business Administration. And the requirement for that is that 60% of the funds be used for qualified payroll expenses. And there's a pretty wide range of stuff that's in there: wages, wages and benefits. And the amount of the loan is determined by the amount of payroll expenses for a typical month or months from earlier in the year. In the first round of loans, the percentages were different and then they were updated so that 60%, as long as you spend 60% on qualified payroll expenses and the remaining 40% on rent, mortgage interest, and some specific utilities than the entire loan is forgivable. And for loans under a $150 thousand, they're actually automatically forgivable. And then anything that's not forgiven is repaid over two years, or now I think they can all be rolled into 5 years at 1% interest. So the deadline to enroll in the program was August 8th, So that's passed, but the forgiveness is actually going on now. And again done by the banks but approved by the Small Business Administration. And it's a process. And a process that isn't necessarily, you won't necessarily receive it. You won't receive a 1099. So it's not necessarily clear when all this is happening. And it's also the tax implications are still a little unclear and they're being modified kinda as we speak. The latest guidance was actually issued this week. So PPP loan up to $10 million depending on payroll. If it were typical loan provisions like I was saying, repaid over two years or five years at a 1% interest rate. But of course, it's not a typical loan. It can be forgiven provided that the expenses,  that the funds were used for these qualified expenses and at least at least the amount used in payroll expenses. Which is great. From a tax standpoint, it gets a little more complicated and this is really what's evolving. When the legislation was passed, it was kinda stated as tax-free forgiveness. And it's true the forgiveness is not income. So the amount of loan that is forgiven doesn't go into your gross income like it would for any other cancellation of debt or any other forgiven loan. But the tricky part is that the expenses that were paid with those funds are also not deductible. So you don't have to include the forgiveness as income, but the expenses are not included as deductible expenses. And actually what it looks like people will probably do, tax preparers will do on tax returns is separate that amount out as a miscellaneous expense and remove the PPP loan forgiveness funds from expenses, as opposed to trying to adjust all the tax forms that are all only to reconcile like your 941 or 943 and then the numbers on  your schedule F. Let's go back for a second. One of the things that this is the case for if the loan is expected to be forgiven, not just if it's already forgiven. So normally we would think of if you're a cash basis, cash method tax filer, you would think this happens as the, the, the money changes hands or as the transactions take place. But this forgiveness not being income and expenses not being deductible happens if you even expect that the loan will be forgiven. Okay? So economic injury disaster loan. Also a Small Business Administration loan program, and this one is administered by the SBA. Different purpose. The PPP was more about keeping employees working and keeping them working inside the businesses. That EIDL is more about providing working capital for businesses to have for their normal general operating expenses. Still some restrictions on what kind of operating expenses count, but much broader than than just payroll, basically. And so the feature or the key feature of the EIDL loans is that a portion of the loan up to $10 thousand, so $1000 per employee, up to $10 thousand, could be received very quickly and then not need to be repaid. So that was the advance. And then the remainder could be paid over 30 years, a maximum of 30 years at 3.75% interest. And you can apply for this once. So people would apply for as much they qualified for, as much as they intended to utilize and with the terms that they that they would want to continue with. The applications for the loans are still available, but the advances were depleted this summer. So just to illustrate this, a little more, that EIDL loan is up to $2 million. Of note over $25 thousand loans require collateral so you can go up to $2 million if you if you qualify at that level. But anything over $25 thousand as a collateralized loan. Now the first $10 thousand that people applied for earlier in the year could be an advance, and that would be not repaid, and then the remaining amount will be paid like an advance, not repaid. That makes a taxable income, the advanced being not repaid, it's literally classified as a grant. So taxable income, taxable gross income. The remaining amount is repaid over up to 30 years at 3.75% interest as specified in the loan. So that of course, doesn't have an impact on taxes per se, just an impact on cash flow. So to recap, of course, here we go. PPP forgiveness reduces the expenses, but it doesn't add to income. Whereas the EIDL advance is taxable gross income. And what that means is that both of the programs increase net business income, just do it in very, very different ways. What gets more complicated is that having an EIDL advance reduces the amount of PPP loan that can be forgiven. So if one has an EIDL advanced, there will be a portion of PPP loan that is not essentially not forgivable by the lender. Or at least that the SBA, will not approve for forgiveness by the lender. And then finally the the tax credits. So the Families First Coronavirus Response Act, the FFCRA leave. We're not going to go into a lot of detail on this. I think a lot of you are probably already using this program and are familiar with it. And to the extent that that's not the case, there's a lot of of provisions. And I can't I just  can't do it justice. But the idea is that two weeks of paid sick leave has to be provided for employees that are impacted by COVID-19 in some specific ways, diagnosed, quarantined have symptoms that are being diagnosed. And they have to be paid at a regular rate of pay up to $511 per day. It also adds needing to provide paid sick leave for employees that are caring for a child due to closed schools and daycare, and caring for an individual that is impacted by COVID in the same ways as the employee provisions. The expanded Family and Medical Leave Act leave provides ten more weeks of paid leave for childcare reasons due to closed childcare and school. The child care part of the paid sick leave is only required at two thirds of the regular rate of pay. And there are some exceptions to that part for businesses with less than 50 employees. Under certain circumstances where the employees are, are essential in, again, some specific ways to the business. The upside is the tax credit. So the tax credit will cover the wages up to those specified limits. And there's also some provisions for claiming that tax credit as a self-employed individual who was impacted and one of those ways, like an employee diagnosed, quarantined, unable to work, et cetera, due to having COVID. And either way for employees or for self-employed, it's ultimately on the 2020 tax return. But there are mechanisms to get that tax credit advanced and provide those funds before the end of the year. One way, a key way is to retain payroll tax deposits. So instead of depositing the normal tax deposits like you would normally do on a weekly, monthly, quarterly basis, whatever, you would not deposit those. And that will be reflected in your 943 or 941. And that's one approach. Another you can submit a specific form, a form 7200, that also has to do some coordinating and reconciling with the 941 or 943, and then all of that would reconcile with you or 2020 tax return. And for all of this, tax implications-wise, please talk with your tax preparer. There's a lot of stuff going on this year. And guidance is still evolving. Your tax preparer is a wonderful resource. You need that as a resource for tax planning. And there's also some great resources if you prepare your own taxes. And then finally, the employee retention tax credits, which is basically available if the other programs have not already been used. For example, you can't use this program if the business already received a PPP loan or if other credits were used to offset the payroll expenses. So if COVID-19 related business restrictions caused a full or partial shutdown of the business, or a really, really significant decline in revenue, like 80% or some very significant decline for quarters under certain circumstances, lots, lots of calculations. Then there's a tax credit available for 50% of the qualified wages, up to $10 thousand of wages per employee or $5 thousand of credit per employee. But again, that's if other tax provisions have not already been used. And then the last thing to mention is that there is an executive order allowing payroll tax deferral for you can defer the employer portion of the Social Security tax, that's on both the wages paid to the employees and self-employment net earnings. You can defer that employer portion to be paid back in 2021 and 2022. So it's for the dates here. I don't know if that's retroactive. I think that it's tied to 943s. But then whatever is deferred must then be paid back, half by December 31st of 2021, and half by December  31st of 2022. So kind of summing it up, tax management type stuff to look at in terms of direct payments and the loan programs that are generating income or we're generating additional net farm income is typical tax planning things, particularly if you're a cash method filer. If your business files on a cash method, timing of your sales income, prepaid expenses, depreciation expenses, direct expensing. All those things will be useful tax planning tools. Since things are again kinda tricky as the guidance as evolving, some of these things will be, depreciation in particular, will be handy going forward. And then the final part for the tax credits is handling those advances. The payroll tax deposit deferrals are the payroll tax deposit retaining those or filing a form 7200, and there is timing issues about filing that with the the 943 or 941. So I would wrap this up by saying once again talk with your tax preparer. One piece of this is that again, as we've talked about, the, each program could impact the other programs. For example, the EIDL advance, reducing the PPP forgiveness, or the employee retention tax credit, depending on what other programs you've participated in. The financial implications  can be significant for any of these programs, PPP forgiveness, that can be significant. Sickly wages can be a big expense, and the tax credits accounting for those. Then, you know, the part where the guidance is still evolving that complicates things, but it is evolving quickly. There's been  new guidance even just coming out this week. So that's, that's coming along. But keeping in touch with the tax preparer for the information that you're updating for your taxes is really, would be really helpful. And so we can take some questions now.