Understanding the Stimulus Package

By Paul Miller, CPA, Miller & Co, LLP

As global economies continue to plummet, the U.S. stimulus package is expected to boost spending and shore up at least a portion of the national economy. The officially titled “economic impact payments” are part of a $2 trillion stimulus package created by the government at the end of March in response to the global pandemic and its economic ramifications.

The stimulus package was designed to ease the economic burden placed on American families and small businesses during the crisis. And while the $1,200 payments made to most U.S. taxpayers may help ease the burden of unpaid bills, the stimulus package will have little effect on boosting consumer spending, easing the stress on global economies or setting the banking industry on a healthy track.

Now vs. Then

Compared to stimulus packages aimed at getting consumers to spend more and move the country out of a recession, the 2020 stimulus package barely puts most Americans on a track to fiscal health. The one-time influx of cash may cover some Americans’ mounting unpaid bills and increased grocery costs. And those who don’t need to spend it right away may stash it in savings to cover future losses.

The general economy is not expected to reap many benefits from this stimulus package, especially compared to past governmental recovery programs. For example, the American Recovery and Reinvestment Act (ARRA) of 2009 played a key role in ending the Great Recession. The ARRA followed the 2008 banking industry bailout. One big difference today is that the 2020 stimulus package is not nearly as complicated as the ARRA, which provided many levels of assistance to individuals and businesses.

Simplicity and Challenges of 2020 Stimulus Package

Everyone who filed taxes in 2018 or 2019, including Social Security recipients, has received or will receive automatic tax refund payments under the rules of the 2020 stimulus package. $1,200 for single and $2,400 for Married Filing Jointly(MFJ).  There are adjusted gross income limits, as Americans who is single and earned below $75,000 will receive the full benefit, its $150,000 for married filing jointly.  The stimulus is phased out for single individuals its $75k-98K and for MFJ its 150-198K. Measures have been put in place to allow Americans who didn’t file taxes to claim their payments. It’s called the Simple filer return with the IRS.

Unemployment benefits also receive a federal boost. Other accessible relief measures for American individuals are available in the form of:

• No-penalty for early retirement account withdrawals up to 100k per individual.
• Expansion of family leave benefits now a 12-week period.
• Homeowner mortgage forbearance on loans generally banks are giving 3 months.
• Renter eviction protections
• Suspended student loan payments with no late fees

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides the stimulus package for individuals and small businesses, isn’t as clear-cut for small businesses. In the $2 trillion stimulus package, small businesses have multiple options, causing confusion about which steps are the best to take for small business owners across all industry sectors.

Small Business Aid Decisions

Because the stimulus package options aren’t clear-cut or automatic for small business owners, it’s been recommended that they contact their accountant to help make the right decisions about applying for aid. The last thing a small business needs is to get strapped with loans that may be difficult to repay. Nor does any business want to incur undue tax burdens down the line.

Accountants who understand the nuances of their client companies will play a key role in deciphering the stimulus options for small business owners. By mid-April 2020, the $349 billion approved for small business relief had been totally allocated. The Payroll Protection Program loans were some of the first funds to dry up, and this program may or may not receive additional funding. Plus, the other programs aren’t rolling out as smoothly as businesses wished.

Banking Industry Roles and Obligations

The banking industry is processing the wave of applications for loans in the timeframe required by law. The available options for relief left in the CARES Act include:

• Economic Injury Disaster Loans(EIDL) is a program provided through the Small Business Administration (SBA). It provides low-interest loans that come with a $10,000 advance that small business owners can get within three days, at least in theory. An EIDL advance may be processed as a grant that doesn’t have to be repaid. The loan and advance come with stipulations that funds be used for specific payments, such as:
  • Paying employees
  • Providing COVID-19 sick leave pay
  • Covering rent and mortgages
  • Paying for increases in supplies interrupted by the pandemic
  • Repaying other bills that accrued due to reduced income during the global health crisis
• 7(a) Loan Program is run through SBA-approved lenders in the banking industry. These loans are geared toward small businesses with fewer than 500 employees. Some portion of the loan may even be eligible for forgiveness, but it also comes with caveats that the funding must be used solely for:
  • Payroll
  • Some health care costs
  • Utilities, rent and mortgages
  • Pension benefits
• SBA Express Bridge Loans make up to $25,000 available to those small businesses that already have a relationship in place with an SBA Express lender. Fund disbursement can be relatively quick to provide immediate help as businesses weather the coronavirus pandemic. And the loan can be repaid with EIDL funds when they come through.

Who Qualifies for Stimulus Package Loans?

Non-profits, independent contractors, the self-employed, sole proprietors and partnerships are among those who qualify for assistance through the CARES Act. The 500-employee cap refers to everyone who works in the company, including part-timers and owners. Small business owners can’t compensate employees who make more than $100,000 a year, nor those who live outside the U.S. They also can’t use the funds for payroll taxes or income taxes.

Banking industry lenders qualify small business owners for a loan based on certain factors that include:

• The business was open and in operation before February 15, 2020
• The business owner doesn’t have any currently active loans being used for the same costs

Small business owners can borrow up to 2.5 times the average amount of their monthly payroll, up to $10 million. While interest begins accruing the moment the loan is dispersed, a five-year repayment schedule doesn’t begin until 2021. Interest rates are based on a one-percent rate over the cap of a selected index, such as the 10-Year Treasury or the Prime.

The 2020 stimulus package doesn’t leave out big business either. The airline industries are being offered billions in loans. There are even some grants available for carriers that don’t cut worker’s pay or furlough any employees before September 30, 2020. Funds also are set aside for corporate loans that must be repaid within five years.

How to Successfully Manage Stimulus Package Funds

For many individuals and small business owners, paying the rent and feeding their families is priority one. They don’t need advice or guidance about how to make the money last — in many cases, it just won’t. But anyone with questions should seek assistance to decide whether to apply for a loan, an advance or an early withdrawal.

In many cases, it makes sense to take a beat and consider the consequences of a rush for funding. While a government loan allows a small business owner to pay the staff, will the payback put the company out of business for good? Similarly, taking an early withdrawal from a retirement account may provide some immediate comfort, but will the funds exist for that same comfort level when retirement finally arrives?

The CARES Act stimulus package certainly helps countless individuals and business owners meet important obligations so that they can be open after the dust clears. Global economies eventually will recover, and the banking industry will still be there to make loans. Talk to a qualified accountant before adding additional burdens to an already stretched economic condition. “You can pay me now or you can pay me later” seems like an apt saying at this point. Businesses may need cash now; just make sure the added stress is worth it.