District Extension Agent
It has certainly been a year of challenges. COVID-19 triggered widespread economic harm. Because of these disasters, most farmers received some unexpected payments in 2020. These payments kept many farmers afloat through a very tough year, but proper management of this income is important to maximize its benefit. This unusual year makes end-of-the year planning with a trusted advisor more important than ever.
The Coronavirus Food Assistance Program was created by the USDA to compensate farmers for losses associated with COVID-19. CFAP 1, unveiled in May of 2020, compensated producers through a combination of $9.5 million in CARES Act funding and $6.5 million in Commodity Credit Corporation funding. The first round of payments issued in June with the second round paid in August. As of mid-October, approximately $10 billion had been paid to farmers through CFAP 1, with nearly 10 percent of those payments made to Iowa farmers.
CFAP 2 was announced September 18, with applications allowed through December 11, 2020. CFAP 2 may issue up to $14 billion in additional payments to farmers. USDA had issued $6 billion in CFAP 2 payments by the third week of October, with Iowa farmers receiving $604 million of those payments. Farmers must include CFAP payments in gross income (subject to self-employment tax) for the year in which they are received. They are reported on lines 4a and 4b of IRS Form 1040, Schedule F
Farmers concerned about this income bunching, can defer income from the sale of crops or livestock in the year of the sale by deferring receipt of payment until the following year through a deferred payment contract. Under such contracts, a farmer can sell a commodity in 2020, but will not receive payment (or trigger income tax liability) until 2021. One of the best features of these contracts is their flexibility. If when filing tax returns for the 2020 year it would benefit the farmer to recognize income from the deferred price contract in 2020, the farmer can elect to report constructive receipt of the income in 2020, the year of the sale. Many farmers, like most Americans, received economic impact payments, also called “stimulus payments,” in 2020. These were $1,200 payments ($2,400 for a couple) and $500 for children under 17 years of age. These payments are not included in gross income and will not generate tax liability.
Many farmers also received Paycheck Protection Program loans in 2020. When forgiven, the proceeds of the loan are not included in gross income and will not be subject to taxation. Current guidance from the Department of the Treasury, however, provides that expenses paid with the loan (if it is forgiven) are not deductible. There is broad support for Congress to change this rule, but it is unclear whether that will happen. In the meantime, it may be best for farmers to wait to apply for forgiveness until more is known. Some farmers also received EIDL advances in the amount of $1,000 per employee (up to $10,000). These advances (called grants by SBA) reduce PPP loan forgiveness. Because the CARES Act does not exclude EIDL grants from gross income (as it does a forgiven PPP loan), these grants should be reported in gross income absent guidance to the contrary.
Farmers have a number of tools available to help manage their tax liability. Some of these options, however, are only available through year-end.
Avoiding income spikes and dips prevents overall income from being taxed at unnecessarily high tax rates. Some common techniques farmers may use to avoid this problem include income averaging, prepaying expenses, making contributions to retirement accounts, gifting grain to a charity, carefully timing the purchase or sale of assets, entering into or electing out of deferred payment contracts, and properly managing depreciation and expensing decisions. Farmers should consult with their advisors to discuss their best options.