Tomorrow, voting concludes in one of the most contentious elections of our lives, but it’s just another chapter in the wild story that has been 2020. We’ve had a pandemic, heightened racial tensions and a faltering economy. A client told me last week that he feels like the world around him is on fire. And with Covid-19 infections coming back with a vengeance, stimulus talks at a standstill and an unpredictable election, things are set to only get more tumultuous.
You may be election-exhausted by now. You may be one of the 92 million Americans who have already voted. But no matter who wins on Tuesday (or later, as seems likely), it’s important to understand what’s at stake for small business owners tomorrow and in weeks and months to come.
Negotiations have been stalled for weeks over a next round of stimulus, and the upcoming election may spark a renewed focus on supporting recovery. Many economists credit the three stimulus packages passed at the beginning of the pandemic with preventing severe economic damage. The $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act was the largest aid package in American history. Small businesses benefited from Economic Injury Disaster Loans (EIDL) and the new Paycheck Protection Program (PPP).
But now, as CARES’ impact fades, we are still far from full recovery. The recent rise in coronavirus cases, new lockdown orders looming, 12.6 million workers on unemployment and eight million American pushed into poverty all jeopardize continued recovery in the fourth quarter.
While everyone can agree we need more stimulus, Republicans and Democrats in Congress can’t seem to agree on what that would look like. The most recent Democratic relief plan passed on October 1st, known as the Heroes Act 2.0 is a $2.2 trillion version of the $3.4 trillion Heroes Act passed in May. The proposal has not passed in the Senate due to opposition from Republicans.
For small businesses, that proposal includes $30 billion additional for PPP. It allows for second loans to small businesses with fewer than 200 employees that have experienced a 25% reduction in quarterly revenue. It also provided money specifically for the airline and restaurant industries, as well as for Community Development Financial Institutions
The Republican plan, blocked by Democrats on October 20th, also would have bolstered PPP. It allotted an additional $258 billion to the program and would have allowed hard-hit businesses to take out second loans. The Democrats argued that the GOP plan was inadequate to address the needs of the country during the pandemic. Each side blames the other for the standoff on additional stimulus.
Vice President Biden has outlined stimulus measures on his website including:
- Establishing a small-business trust fund: $60 billion in funds for smaller lenders and community based financial institutions.
- Reserving half of new PPP funds for businesses small businesses with 50 employees or less
- A “weekly dashboard” to show which small businesses are accessing loans
- Restricting PPP amounts to no more than lost revenue
- Guaranteeing that every small business will get relief, rather than capping the fund.
If President Trump is reelected and Republicans keep the Senate, a rescue bill could still pass before the end of the year. If former vice president Joe Biden wins and Democrats gain control of the Senate, relief will likely be stalled until January, when Democrats will face less Republican opposition to a larger package. Either way, the fate of small businesses seems to rest in the hands of the candidate who wins tomorrow.
While New PPP stimulus is on the table, the election will also play a role in the how the current PPP forgiveness provisions will work. PPP overall has been a bit of a mess with 11 pages of Frequently Asked Questions, 26 Interim Final Rules (the latest of which came out on Oct 19th) and banks still taking different approaches to forgiveness. This confusion is on top of the recent allegations of widespread fraud in the EIDLs.
Currently three versions of the forgiveness application exist:
Lenders can also use their own equivalent form. The 3508EZ and 3508S are shortened versions of the forms for borrowers who meet certain requirements. For the 3508EZ you must be self-employed with no employees or have not reduce the salaries and wages below 25%. For the 3508S is for those borrowers who took out less than $50,000 in loans.
Additionally, just today the SBA also introduced a 30-day notice for comment that introduces two new questionnaires for PPP Loan Borrowers over $2 million — form 3509 for for-profit borrowers and 3510 for non-profit borrowers.
According to the SBA’s chief of staff and associate administrator William Manger, the SBA received only 96,000 forgiveness applications as of early October. That is just 2 percent of the 5.2 million loans issued. Additionally, none had actually been forgiven as of October 1, although the SBA said it finally began sending forgiveness payments out on October 2.
The next administration, whoever that may be, could follow previous proposals of forgiving loans under $150,000 just by signing a certification. According to the SBA data, there are over 4.5 million loans under $150,0000, which is 87% of all loans. Borrowers, lenders and the SBA would all benefit by streamlining the administration of those loans. Either way, as with the stimulus package, it will take broad consent to get that done. Given the legislative uncertainty, it may be more efficient to wait to apply for forgiveness.
A New Tax Plan
Lastly, a new administration could enact new tax policies that would affect small businesses. Former Vice-President Biden has proposed several tax changes that may have an impact on small business owners, including:
- Raising the corporate income tax rate to 28% as opposed to the current 21%
- Phasing out the Qualified Business Income deduction (Section 199A) for filers with taxable income above $400,000. (An income threshold already applies to many pass-through business owners.)
- Increasing the capital gains rate to 39.6% for investment income above $1M
- Imposing a 12.4% payroll tax on income above $400,000
- A credit for small businesses that provide retirement plans for their employees
- An expansion of the existing premium tax credit that makes state-sponsored health plans more affordable
The Trump campaign has outlined an agenda for tax proposals but has not offered many specific proposals. Regardless, even current programs raise a number of issues that will still need to be resolved by next tax season including:
- The deductibility of expenses paid with PPP loan funds. Forgiven loan funds were intended to be non-taxable. However, the IRS has not stated that deductions will not be allowed for expenses paid with these funds. If that’s the case, these funds will become taxable through the backdoor. It also creates a discrepancy between those business owners who receive a deduction based on owner’s pay (no tax deduction taken) and those that paid payroll and non-payroll expenses.
- The treatment of the payroll tax suspension: The payroll tax suspension has been in effect since September 1 and lasts through the end of the year, on for employees making less than $4,000 for any bi-weekly pay period (i.e., $2,000 per week, or $104,000 per year). This was a deferral, not a tax cut, meaning the taxes will still need to be paid. Just not until 2021. Trump has promised to push for these deferred taxes be completely forgiven if re-elected.
- Making the 2017 Tax cuts permanent: The Tax Cuts and Jobs Act (TCJA) passed in 2017 has many key provisions that will expire in 2025, including Qualified Business income Deduction mentioned above. Whether or not these become permanent will be a significant issue for small businesses.
No matter who wins on Tuesday, he and his administration will have a lot of work to do in January.
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