Summary of California Drought Relief Grant Program

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AB 157, signed into law by Gov. Newsom on September 27, 2022, includes the creation of the “California Small Agricultural Business Drought Relief Grant Program”, for qualified small agricultural businesses who are impacted by drought according to USDA data. The program has been funded with $75M, and may be funded by the legislature in future years. Because eligibility requires providing both 2019 and 2022 tax returns, we know that the state likely will not begin accepting program applications until at least March 15, 2023.

Who qualifies for the grant

What is an agricultural business?

The definition of agricultural business includes producers, of course, but also the following NAICS codes:

  • Codes beginning with 115 – support activities for agriculture and forestry
  • Codes beginning with 311 – food manufacturing
  • 424910 – farm supplies merchant wholesalers
  • 444240 – nursery, garden center, and farm supply retailers
  • 484220 – specialized freight, trucking, local trucking (local agricultural products trucking)

What is a “qualified small business”?

  • Has a physical presence in California
  • Has 100 or fewer full-time employees
    • Full-time employee means an employee who is employed for 40 hours per week
  • Experiences a decline in annual gross receipts of at least 10%
  • Has operated in the state since before 1/1/20
  • Is currently operating in the state
  • Per USDA drought monitoring data, is affected by severe drought
  • Provides the necessary organizational documents and tax return information to prove eligibility

How the grant works

What is the grant based on?

  • A decline in tax-basis gross receipts or gross profits, by comparing the business’s 2019 tax return to the business’s 2022 tax return

How much can a qualified small business receive?

  • $60,000, if your decline in gross receipts or gross profits is 30% or more, but less than 40%
  • $80,000, if your decline in gross receipts or gross profits is 40% or more, but less than 50%
  • $100,000 if your decline in gross receipts or gross profits is more than 50%
  • For small and socially-disadvantaged farmers, a grant of $20,000 is available if the decline in gross receipts or gross profits is at least 10% but less than 30%

How funds are treated

How can the funds be spent?

  • The funds must be used for maintaining the business through the drought
  • Employee expenses, including payroll, health benefits, paid sick or family leave, and insurance premiums
  • Working capital and overhead, including rent, utilities, principal and interest payments on mortgages and other debt incurred before the drought onset
  • Any other drought-related expenses not otherwise covered under other forgivable loans, grants, or other state or local programs

Are the grants taxable?

  • For federal income tax purposes, yes
  • For California income tax purposes, yes, unless the state legislature acts to exempt them

How are funds reserved by the state?

  • $7.5M (10%) of funds appropriated will be held for applicants who won’t file 2022 tax returns until 2024
  • $15M (20%) of funds will be allocated to small and socially disadvantaged farmers who are qualified small agricultural businesses
  • $3.75M (5%) of funds will be reserved for nonprofits, tribal governments, resource conservation districts, or other entities with experience providing technical assistance to small farms or socially disadvantaged farmer to provide services to maximize participation
  • Remainder of the funds available for qualified small agricultural businesses

What don’t we know yet?

  • What applications will look like
  • When applications will be accepted – but we do know that three weeks before applications are accepted, the state is required to begin publicizing and raising awareness for the application process
  • What the definition of “gross profits” is
  • What additional reporting will be required to prove funds were spent on authorized expenditures
  • What, if any, “related party” rules may apply

Is there a question we didn’t answer? Contact our Pinion tax advisors with questions on eligibility or guidance through the application process.

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