Business and Financial

Written by Peggy Kirk Hall and Barry Ward, Leader, Production Business Management

Many farmers have utilized the CARES Act’s Paycheck Protection Program (PPP) to obtain federal funds to help with payroll and certain non-payroll expenses in the wake of COVID-19.  As we’ve discussed on our Farm Office Live webinars here, Congress revised the PPP with the passage of the Paycheck Protection Program Flexibility Act earlier this month.  As a result of the new legislation, the Small Business Administration released a series of Interim Final Rules (IFRs) and a new forgiveness application.  The IFRs, available here, clarify certain points contained in the bill and provide revisions to previous IFRs.  All of these changes affect how farmers can use the funds and how much of the funds can be forgiven from loan repayment requirements. 

The new PPP provisions

• The “covered period” that applies to the issuance and use of PPP loan expenditures was to end on June 30, 2020, but the law now extends that date to December 31, 2020.  This means that borrowers now have until December 31 to spend PPP loan proceeds.
• The “covered period” for loan forgiveness has also changed.  Borrowers will now be able to have up to 24 weeks of costs forgiven and not subject to repayment.  But borrowers who received loans prior to June 5, 2020 may choose to use the 8-week period provided in the original PPP.  A borrower need not wait until the end of the covered period to apply for forgiveness if the borrower has expended the loan funds prior to the end of the covered period.
• The requirement that 75% of loan proceeds be used for payroll costs in order to receive full forgiveness has been reduced to 60%.   This means that forgiveness is not applicable for any portion of non-payroll costs that exceed the 40% maximum for non-payroll.  Under the original law, forgivable non-payroll costs could not exceed 25%.
• The amount eligible for forgiveness can equal the full loan amount plus accrued interest, and the IFR revises the eligible costs for both the 8-week and 24-week covered periods as follows:
  • Payroll costs for 24 weeks at a maximum of $46,154 per employee and for 8-weeks at a maximum of $15,385 per employee, as well as benefits such as health care costs, state payroll taxes paid by the employer, and retirement contributions.  Note that there are limitations to including health insurance contributions made on behalf of self-employed persons, general partners and owner-employees of S-corporations and to including employer retirement payments on behalf of self-employed persons or general partners.
  • Owner compensation replacement is calculated according to 2019 net profit.  The forgiveness limit for an 8-week covered period is 8/52 of the 2019 net profit, up to $15,385 and for a 24-week covered period, is restricted to two and a half months or 2.5/12 of 2019 net profit, up to $20,833.
  • Mortgage interest, rent payments on lease agreements, and utility payment costs are eligible to the extent that they would be deductible as business mortgage, rent and utility payments on Form 1040 Schedule F or Schedule C.  Note that although this language defines the forgivable portions of these non-payroll costs, such costs are not actually deductible if forgiven.
• Employers will have a longer period to rehire employees and restore salaries without reducing the forgiveness amount.  This “safe harbor” date for rehiring employees is extended to December 31, 2020.
• An employer who isn’t able to rehire employees by the end of the “safe harbor” period may qualify for an exemption from a corresponding forgiveness reduction that would occur if the employer can document that:
  • The employer is unable to rehire persons who were employees on February 15, 2020 or to rehire similarly qualified persons, or
  • The employer is unable to return to the same level of business activity it was at before February 15 due to COVID-19 standards and requirements.
• For new loans taken out after June 5, loan proceeds that are not forgiven may be repaid in five years rather than two years.  Loans prior to June 5 remain at a two-year repayment term, unless the lender agrees otherwise.
• Borrowers can defer repayment of the loan until the date that the lender receives the borrower’s forgiveness amount, or until 10 months from the end of the borrower’s forgiveness period if not applying for forgiveness.              
• The original law prohibited borrowers  from using the CARES Act provision that allows employers to defer payroll taxes once they received loan forgiveness, but the new law allows borrowers who receive forgiveness to also defer payroll taxes under the CARES Act.

The forgiveness application and process

A new forgiveness application was also released to correspond with the changes in the new PPP Flexibility Act.  As laid out in the application instructions, borrowers are eligible to use a shorter “EZ application” for loan forgiveness if they meet one of these criteria:

• Borrower is self-employed and has no employees or
• Borrower didn’t reduce salaries or wages for employees by more than 25% and didn’t reduce numbers or hours of employees or
• Borrower experienced reductions in business activity as the result of health directives related to COVID-19 and did not reduce salaries or wages of employees by more than 25%.

The forgiveness process could take up to five months.  It begins with a borrower submitting the application to the lender that provided the loan, who will have 60 days to review the application and send the approved application on to the SBA.  The SBA will have up to 90 days to review the application, confirm the amount to be forgiven and remit to the lender the forgivable amount and any accrued interest, less any advance payments made to the borrower under the Economic Injury Disaster Loan program. 

The Loan Forgiveness Application Form is here and its instructions are here.  The Loan Forgiveness Application Form EZ is available here and its instructions are here. 

Uncertainties remain

Despite the recent changes to PPP, several gray areas and uncertainties remain, such as:

• PPP Loans received prior to June 5, 2020 allow the borrower to choose between an 8 week and a 24 week covered period.  Farmers with a loan based on owner compensation replacement and no employees will likely benefit from choosing the 24 week covered period to meet the criteria for full loan forgiveness.  One possible downside with choosing the 24 week covered period might be further rule changes that might be unfavorable to the borrower, although this is unlikely.  There is still uncertainty as to whether a self-employed person needs to write a check to themselves to qualify for forgiveness based on the owner compensation replacement portion of the PPP Loan. The safe alternative would be to write this check even if the check is deposited back into the same account.
• According to some sources there is ongoing discussion regarding legislation that would grant forgiveness to all PPP loans under $150,000. This discussion of a safe harbor based on the size of the PPP loan is apparently being advanced by certain banks.

We encourage employers who obtained a PPP loan to talk with their lenders and accountants to capitalize on and comply with the PPP changes and make decisions about the forgiveness options.  For those who have not yet applied for a PPP loan, the deadline is soon approaching —applicants have until June 30, 2020 to apply for a loan.

Read more about the PPP’s original provisions in our blog post here.

There’s much disagreement over what we know about COVID-19, but one thing we can agree upon is that it has left an impact on the food supply chain.  For some food producers, that impact is creating opportunity.  Many growers see the potential of filling the gaps created by closed processing facilities, thin grocery shelves, and unwillingness to shop inside stores.   If you’re one of those growers who sees an opportunity to sell food, we have a few thoughts on legal issues to consider before moving into the direct food sales arena.  Doing so will reduce your risks and the potential of legal liability.

1.  Follow COVID-19-related guidelines

Perhaps this goes without saying, but businesses should take COVID-19 guidelines seriously.  Doing so will hopefully reduce the potential of a COVID-19 transmission in the operation while also minimizing the risk of an enforcement action and potential legal liability for failing to protect employees and customers.   Follow the Ohio Department of Health Responsible RestartOhio Guidelines that are now in effect.  Engaging directly with customers places a grower in the “Consumer, Retail and Services” sector guidelines, which are here.  Mandatory requirements include protecting the health and safety of employees, customers and guests by establishing six-foot distances or barriers, wearing face masks, handwashing and sanitizing, checking for symptoms daily, posting signs, deep cleaning, and dealing with suspected and confirmed cases of COVID-19.   The FDA has also issued “Best Practices for Retail Food Stores, Restaurants and Food Pick-Up and Delivery Services” here, and OSU’s direct marketing team has many helpful resources for implementing the practices here.   Develop protocols based upon the guidelines, carefully train employees on protocols, and document your compliance.

2.  Determine what food safety regulations apply to you

For food safety purposes, the Ohio Department of Agriculture and local county health department require licensing or inspection of certain types of food sale activities.  The regulations are a bit messy, and it’s challenging to know when an operator is affected by these regulatory requirements.  We’ve explained licensing laws pertaining to sales directly at the farm in this law bulletin, “Selling Foods at the Farm:  When Do You Need a License?”   There are more stringent requirements for those who sell meat, process food, or sell higher risk foods or several different types of foods.   We’ve provided a few simple guidelines in the chart at the end of this post, but please refer to the above law bulletin for further details.  Additionally, produce growers need to comply with Good Agricultural Practice (GAPs) and Food Safety Modernization Act (FSMA) rules.  Learn more about those on our Fruit and Vegetable Safety Program website here.

3.  Check your zoning

If you’re within a municipality, you may have zoning regulations that apply to your production and sales activities.  Check your local zoning regulation to ensure that those activities are “permitted uses” within your designated zoning district.  If not, you may need to seek a “conditional use” permit.  Also be aware that some municipal zoning regulations regulate “home businesses,” and a home bakery or cottage food operation that has customers coming to the home to purchase the goods might fall into that category. 

If you’re outside a municipality, Ohio’s agricultural exemption from county and township zoning applies to your production and sales activities.  Local zoning can’t prohibit your activities regardless of your zoning district, with limited exceptions if you’re in a “platted subdivision” situation (on a lot under 5 acres in a platted area of at least 15 other contiguous lots).  Note, however, that county and township zoning can regulate a “farm market” that receives more than 50% of its gross income from goods that weren’t raised on the owner’s farm.   You might need to comply with a few zoning regulations that pertain to the size and setback lines for your structure, the parking area, and ingress and egress points for customers.

4.  You may have to collect sales taxes on some items

Most takeaway food items to be consumed off-site, such as meat and produce, aren’t subject to Ohio’s sales tax.  But if you sell items that are not exempt from sales tax, you’ll need to collect sales taxes on the items.  If you’re planning to sell ready-to-eat items on site, beverages, flowers, or container plants, you must charge and collect sales taxes and obtain a vendor’s license in order to submit the taxes to the state.  Find more details in our law bulletin on vendor’s licenses and sales taxes here.

5.  Review contracting situations

You’ll likely be presented with a contract or agreement in many situations, such as a farmers’ market contract or an agreement for selling on an online sales platform.  Or you may need to generate your own contract for selling whole animals or establishing a “community supported agriculture” operation.  In either instance, read your contracts carefully.  Be sure to include and review important terms such as price, quality delivery dates, payment processes, late fees, data use, and other provisions related to your type of sale.   Don’t hesitate to involve an agricultural attorney to be sure that you’ve minimized your legal risk.

6.  Talk to your insurance provider

Direct food sales might not be adequately covered by your insurance policy.   You’ll need to know whether you have sufficient premises liability coverage if a customer is harmed on your farm, coverage for transporting foods or for selling at a farmers’ market (typically required by the market) and product liability coverage in case someone claims illness or other injury from consuming your food.  You may need to increase coverage or purchase additional riders to the policy, depending on your risk level.  Reviewing your policy with your provider and aligning coverage with your food sales activities is imperative to reducing your liability risk.

7.  Do you need a separate business entity?

Consider whether your food sales activities put other assets at risk, and whether your insurance is sufficient to address that risk.  If not, you should consider forming a separate business entity for your direct marketing business.   Forming a Limited Liability Company for your direct food sales activities can help shield your other assets from the liability of the food sales.  Talk with an agricultural attorney to assess your needs and determine what type of entity is best for your situation.

8.  Keep great records

This one applies to everything above.  Maintain records of what you do in regards to COVID-19 precautions, employee training, food safety compliance, and financial records of your expenditures and sales.  If a liability incident arises, document it carefully.  Keep the records for the required amount of time, which is typically three years for receipts for purchases and sales, ten years for insurance and employee records, and permanently for other records.

9.  Don’t stop here

This list is a starting point for legal considerations for direct food sales, but it shouldn’t be the end.  There may be other legal issues that affect your particularly situation.  To learn more and fully consider all risks of direct marketing, talk with others who’ve directly sold food, visit with your accountant, lawyer and insurance provider, and learn the best practices for growing and marketing your food products. 

Written by Ellen Essman and Peggy Kirk Hall

Many people are still working from home, but that hasn’t stopped legal activity in Washington, D.C.  Bills have been proposed, federal rules are being finalized, and new lawsuits are in process.  Here’s our gathering of the latest ag law news.

SBA posts Paycheck Protection Program (PPP) loan forgiveness application.  We’ve been waiting to hear more about how and to what extent the SBA will forgive loans made under the CARES Act’s PPP that many farm businesses have utilized.  The SBA recently posted the forgiveness application and  instructions for applicants here.  But there are still unanswered questions for agricultural applicants as well as talk in Congress about changing some of the forgiveness provisions, suggesting that loan recipients should sit tight rather than apply now.  Watch for our future blog post and a discussion on the forgiveness provisions in our next Farm Office Live webinar.    

House passes another COVID-19 relief bill.  All predictions are that the bill will go nowhere in the Senate, but that didn’t stop the House from passing a $3 trillion COVID-19 relief package on May 15.  The “HEROES Act” includes a number of provisions for agriculture, including an additional $16.5 billion in direct payments to producers of commodities, specialty crops and livestock, as well as funds for local agriculture markets, livestock depopulation losses, meat processing plants, expanded CRP, dairy production, other supply chain disruptions, and biofuel producers (discussed below).  Read the bill here.

Proposed bipartisan bill designed to open cash market for cattle.  Last week, Republican Senator Chuck Grassley and Democratic Senator Jon Tester introduced a bill that “would require large-scale meatpackers to increase the proportion of negotiable transactions that are cash, or ‘spot,’ to 50 percent of their total cattle purchases.” The senators hope this change would bring up formula prices and allow livestock producers to better negotiate prices and increase their profits. In addition, the sponsors claim ithe bill would provide more certainty to a sector hard hit by coronavirus.  Livestock groups aren’t all in agreement about the proposal.  You can read the bill here, Senator Grassley’s press release here and Senator Tester’s news release here. 

New Senate and House bills want to reform the U.S. food system.  Representative Ro Khanna from California has introduced the House companion bill to the Senate's Farm System Reform Act first introduced by Senator Cory Booker in January.  The proposal intends to address underlying problems in the food system.  The bill places an immediate moratorium on the creation or expansion of large concentrated animal feeding operations and requires such operations to cease by January 1, 2040.  The proposal also claims to strengthen the Packers and Stockyards Act and requires country of origin labeling on beef, pork, and dairy products.  The bill would also create new protections for livestock growers contracted by large meat companies, provide money for farmers to transition away from operating animal feeding facilities, strengthen the term “Product of the United States” to mean “derived from 1 or more animals exclusively born, raised, and slaughtered” in the U.S., and, similar to the Grassley/Tester bill above, require an increased percentage of meatpacker purchases to be “spot” transactions.

Lawmakers ask Trump to reimburse livestock producers through FEMA.  In another move that seeks to help livestock producers affected by the pandemic, a bipartisan group of U.S. Representatives sent a letter to Donald Trump imploring him to issue national guidance to allow expenses of livestock depopulation and disposal to be reimbursed under FEMA's Public Assistance Program Category B.  The lawmakers reason that FEMA has "been a valued Federal partner in responding to animal losses due to natural disasters," and that the COVID-19 epidemic should be treated "no differently."  You can read the letter here.

More battling over biofuels.  Attorneys General from Wyoming, Utah, Louisiana, Oklahoma, Texas, Arkansas and West Virginia have sent a request to EPA Administrator Andrew Wheeler to waive the Renewable Fuel Standard (RFS) because of COVID-19 impacts on the fuel economy. The letter states that reducing the national quantity of renewable fuel required would alleviate the regulatory cost of purchasing tradable credits for refiners, who use the credits to comply with biofuel-blending targets.   Meanwhile, 70 mayors from across the U.S. wrote a letter urging the opposite, and criticizing any decisions not to uphold the RFS due to the impact that decision would have on local economies, farmers, workers, and families who depend on the biofuels industry.  The House is also weighing in on the issue.  In its recently passed HEROES Act, the House proposes a 45 cents per gallon direct payment to biofuel producers for fuels produced between Jan 1 and May 1, 2020 and a similar payment for those forced out of production during that time.  

New USDA rule for genetically engineered crops.  A final rule concerning genetically engineered organisms is set to be published this week.  In the rule, USDA amends biotechnology regulations under the Plant Protection Act.  Importantly, the new rule would exempt plants from regulation by the Animal and Plant Health Inspection Service (APHIS) if the plants are genetically engineered but the same outcome could have occurred using conventional breeding.  For instance, gene deletions and simple genetic transfers from one compatible plant relative to another would be exempted.  If new varieties of plants use a plant-trait mechanism of action combination that has been analyzed by APHIS, such plants would be exempt.  You can read a draft of the final rule here.

Trump’s new WOTUS rule attacked from both sides of the spectrum.  A few weeks ago, we wrote about the Trump Administration’s new “waters of the United States” or WOTUS rule.  Well, it didn’t take too long for those who oppose the rule to make their voices heard. The New Mexico Cattle Growers Association (NMCGA) sued the administration, claiming that the new rule is still too strict and leaves cattle ranchers questioning whether waters on their land will be regulated.  In their complaint, NMCGA argues that the new definition violates the Constitution, the Clean Water Act, and Supreme Court precedent.  On the other side, the Natural Resources Defense Council (NRDC), along with other conservation groups, sued the administration, but argued that the new rule does not do enough to protect water and defines “WOTUS” too narrowly.  Here we go again—will WOTUS ever truly be settled?

The Farm Office is Open!  Join us for analysis of these and other legal and economic issues facing farmers in the Farm Office Team’s next session of “Farm Office Live” on Thursday, May 28 at 9:00 a.m.  Go to this link to register in advance or to watch past recordings.

Farmers aren’t traditionally eligible for unemployment benefits, but that won’t be the case when Ohio’s newest unemployment program opens.   We've been keeping an eye out for the opening of the Pandemic Unemployment Assistance (PUA) program, which will provide unemployment benefits to persons affected by COVID-19.  The program is targeted to persons who are not eligible for regular unemployment benefits, such as self-employed and 1099 filers.   PUA is yet another economic assistance program generated by the Coronavirus Aid, Relief and Economic Security (CARES) Act recently passed by Congress.

PUA will provide regular unemployment benefit amounts to qualifying individuals, plus an additional $600 per week for the period of March 29 to July 25, 2020.   Qualification doesn’t include a minimum income requirement, but a person must not be eligible for Ohio’s regular unemployment benefits and must not be currently receiving vacation, sick or other paid leave.  The applicant must also be unable to work due to one of the following situations:

• The applicant has been diagnosed with COVID-19 or has symptoms and is seeking medical diagnosis;
• A member of the applicant’s household has been diagnosed with COVID-19;
• The applicant is providing care for a family or household member who has been diagnosed with COVID-19;
• The applicant cannot work due to caring for a child whose school or other facility has closed due to COVID-19;
• The applicant has become the primary support for a household because the head of the household has died due to COVID-19;
• The applicant has quit his or her job, was laid off, or could not begin a new job as a direct result of COVID-19;
• The applicant’s place of employment is closed because of COVID-19.

Applications should open by mid-May on the Ohio Department of Job and Family Services website.  Self-employed individuals will have to submit proof of employment, such as earnings statements that reflect profit and loss, payroll deposits, or a 2019 tax return.  The unemployment benefits will be retroactive to the date of eligibility and will last for no more than 39 weeks, up to December 26, 2020.  PUA may also provide an additional 13 weeks of benefits for those who’ve exhausted regular unemployment benefits.  To learn more or apply for PUA, visit https://unemploymenthelp.ohio.gov/expandedeligibility/.