SHARE Signal To Noise: Biden Tax Plan & More PPP Gross Receipts Questions
By Paul Neiffer Principal CLA Walla Walla Washington Email T. 509.823.2920
We led off the broadcast with the Biden Tax Plan and how it might affect farmers. We will likely do an Ag Insights on the his tax plan at a later date but this is a good start on how it may affect you.
In FAQ #1 they state that gross receipts include all income reported by for-profit entities including interest, dividends, rents, etc. but exclude capital gains. We originally assumed that gains reported on Form 4797 would still be included as part of gross receipts since they are “technically not capital gains”.
However, in FAQ #5, the SBA then list specific lines off of income tax forms to use in order to calculate gross receipts. For farmers, the pertinent lines are as follows:
- Form 1040, Schedule F would report line 9 (gross income) plus line 1(b) (cost of sales) but nothing from Form 4797;
- Partnerships would use Form 1065 line 2 (cost of sales) plus line 8 total income minus line 6 (Form 4797 gains);
- S corporations would use Form 1120-S line 6 (total income) plus line 2 (cost of sales) minus line 4 (Form 4797);
- C corporations would use Form 1120 line 11 (total income) plus line 2 (cost of sales) minus the sum of lines 8 (net capital gain) and 9 (Form 4797 gains).
This sounds very logical, however, it really does not treat all of these entities equally. For example, on a Form 1120 C corporation return, all interest, dividends and rent income is included in line 11 of the form. However, for a Schedule F, partnership or S corporation tax return, none of this income will be included as part of gross receipts. This means that the SBA guidance discriminates based on the type of entity you use to farm.
Also, how would farmers report deferred payment contracts that for 2019 were based on the year of receipt versus 2020 where they were deferred; or how would you handle crop insurance that is deferred to the following year.
This FAQ seems to assume this will be used for annual calculations only.
If you are reporting it based on a quarterly number, you will still need to provide this information by quarter, but for now, it appears you may be able to use the guidance in these FAQs even though it is flawed.
Let’s look at a couple of examples where the guidance could help or hurt a farmer.
ABC Dairy files as a Schedule F. During 2019, it reported $1 million of gross income on line 9 of Schedule F and had $500,000 of raised breeding stock reported on Form 4797. In 2020, it reported gross income on line 9 of $740,000 and $600,000 of raised breeding stock on Form 4797. If you are able to use FAQ #5 you show a 26% loss in gross receipts for 2020 and are eligible for a PPP loan #2. If you have to include Form 4797 gains, then you only have about a 11% reduction and don’t qualify.
XYZ Farms, Inc. reports income as a C corporation and has total income of $2 million for 2019 including rent income of $200,000. During 2020, it reports total income of $1,450,000 which included no rent income. Since it gross receipts are 27.5% lower than 2019 it qualifies for a second PPP loan.
However, if XYZ Farms, Inc. was an S corporation, the rent income would not be included (it is reported on Schedule K), therefore its reduction in total income is only $350,000 or 17.5% and would not qualify for a second PPP loan.
As you can see there will be winners and losers. However, there will be winners and losers under any method that is utilized and at least we now have some guidance from SBA even though it has its flaws.
Without further guidance, this is what banks will be using to calculate gross receipts. It will be difficult to include Form 4797 gains or losses without further written guidance from SBA.