“Extraordinary times call for extraordinary measures. We saw a need that needed to be filled, and we stepped in to help”. This well-known quote is attributed to Benet Wilson. If only getting our economy back on track was so simple. As I observed the negotiations in Congress, and considered the many tools available, I was curious as to what strategies would be implemented. They had a number of strategic options to consider.
Loans – with low interest rates, forgiveness provisions and advances
Extending Payment Schedules –
Tax Incentives – new deductions, credits, etc.
And, they used all of the above in their initial response. What’s missing? Maybe direct hiring as was done in the 30s with programs such as the WPA and Civilian Conservation Corps. Major infrastructure and climate change related projects could employ millions. Stay tuned as Congress is currently debating how to deal with the longer term economic fallout. In the meantime, let’s discuss what’s been done so far.
Loans
There are two types of loans, the Economic Injury Disaster Loans (EIDL) and the (7A) Paycheck Protection loans (PPL) available to small businesses. Following is a chart that explains the differences.
Click here to see a table that explains the difference between these two types of loans:
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Grants
A $1,000 direct payment that does not need to be paid back. It was initially limited to $10,000, then to $15,000 and ultimately the cap was eliminated.
Extending Payment Schedules
California sales taxes – up to $50,000 of it can be deferred for six months
Federal and state income taxes – extended 90 days
Payroll taxes – but can’t defer if you received loan proceeds to cover this expense
Tax Incentives
Employee Reduction Credit – This credit is not allowed if you take the PPL loan.
This is a fully refundable credit against an employer’s payroll taxes for wages paid from March 12, 2020 through December 31, 2020. It’s 50% of the wages paid to employee, up to a maximum of $10,000 of wages per employee. You must have been fully or partially shut-down in any calendar quarter in 2020 due to Federal, state or local restrictions or experience a significant decline in revenue compared to the same quarter in a prior year.
Net Operations loss rules expanded.
If a business has a net operations loss, its deductions exceed its revenue. (It doesn’t mean that it spent more money than it received. Some deductions, such as depreciation, do not reflect cash payments. The ability to apply these losses against past and future earnings is typically limited to a restrictive schedule. Since that schedule became less restrictive, some people can amend their tax returns and get a tax refund.
And the Rest of the Story….
This change benefits the affluent. Prior to the CARE Act, if you had $500,000 of income you could not benefit from these taxable losses, just as you could not deduct business interest if you made more than $25 million in annual income. The change in the use of net operating losses for those individuals with $500,000 of income former will contribute to a $135 billion loss in federal tax revenue. And, you can imagine who will benefit.
This information is meant to be informative, but it is not comprehensive. Guidelines seem subject to change especially as it relates to industries that were excluded then included, i.e. agriculture. As I write this e-zine, strip clubs, payroll lenders, and lobbyists are lobbying to be eligible for these loans.
For more detailed information see the SBA website: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources.
Did the money go where it was intended? Not all of the proceeds. According The Washington Post, 1.6% of the loans, or $95 million, was for loans of $2 million or more and were assumed to not have gone to small business. “For the most part, these PPP loans appeared to be actually reaching the small business as intended. Loans for less than $150,000 account for 75 percent of total loans – and 96 percent were for less than $1 million. The average loan was $206,000.”
Have a question? Please send an email or give me a call. If I can help you in a 15 -30 minute phone call or via email by providing general information, I will do so on my nickel. If I can’t, I will try to find a resource for you. And, if some analysis specific to your situation is necessary, I will let you know how we might work together.