By Jonathan McElvy
One of the most effective tools implemented by the federal government in the fight against this enemy called COVID was the Paycheck Protection Program.
If you haven’t followed the specifics, this program allowed small businesses to apply for a “forgivable” loan that would offset payroll and other operating costs, and it was a raging success. Businesses were able to pay employees during the worst five-month span since the Great Recession. Expenses such as rent, utilities and telephone were offset with proceeds from the loan.
The Paycheck Protection Program could come back to haunt small businesses when they see how impacts taxes.
There are different analyses on the topic, but the Small Business Administration estimates 51 million jobs were spared thanks to the dissemination of PPP funds. I will openly admit that our company’s ability to secure PPP funds saved the jobs of nearly half of our employees.
That’s the good news, and anyone who reads this should understand how important the Paycheck Protection Program was to millions of small businesses across the nation. Today, however, the federal government seems destined to ruin the very businesses it rescued seven short months ago.
If you are a small business owner, or if you work for a small business (under 500 employees), or if you know someone who fits in that category, which means all of you, please take the time to understand how this piece of federal legislation, known as the CARES Act, could completely backfire on small businesses. Please make sure you are educated on how the same government that sought to prop up businesses now could force the same businesses to lay off millions of people.
You’ll have to excuse this brief lesson on business finances, but there’s no other way to explain it.
You own a business called Barry’s Boxes. Obviously, you sell boxes. Unfortunately, you don’t have a contract with Amazon.
In 2019, before the world came crashing down, you had a good business bringing in $1 million a year in revenue. You had 10 employees (including yourself) each earning a $40,000 salary, and your total expenses for the year (payroll, rent, boxes, etc.) were $900,000.
That means your business showed a profit of $100,000 in 2019, and you had plans to open a second location in 2020. Except that never happened because of COVID.
When the federal government passed the CARES Act, and when banks said they were finally accepting PPP loan applications, you did all the calculations, which were fairly simple. Your total salaries in 2019 were $400,000, and if we avoid all the math, it means you were eligible to receive a PPP “forgivable” loan of $83,300.
Within a week of your application, your bank deposited $83,300 into your account, and you breathed a huge sigh of relief. While your business was still open, you only had 70% of the customers you had in 2019, and you projected revenue to drop to $700,000. Before getting the loan, you considered laying off five of your employees just to make it through the year.
Immediately you put a plan in place to spend the money the right way. You kept your employees paid. You caught up on your rent checks. You paid for the power and your internet connection.
Today, most of those PPP funds are long gone, and you used the money exactly as the government told you to use it. That’s a good thing, because the government promised the loan would be forgiven if you played by the rules.
As Barry’s Boxes nears the end of this year, the business made some needed adjustments, used the PPP money, and will still show a loss. You did $700,000 in revenue (down 30%), and you were able to cut almost every other expense in your company, allowing you to spend $730,000. In other words, you only lost $30,000 this year, which you offset with the money you made last year. So much for expanding your location, but at least you’re still in business.
I imagine if you surveyed 1,000 small businesses, that wouldn’t be far off from the reality of what has happened to most of them. They’re going to show a loss this year, but the government’s stimulus plan (PPP) allowed them to stay open, and hopefully, regroup once the world reopens.
Except that’s not what will happen. There’s a problem with the way the government defined “forgivable.” You see, Barry’s Boxes is going to have to take the $83,300 it received from the government, and when Barry determines if he made money (thus paying taxes) or lost money (not paying taxes), he has to reduce his expenses by the amount of the loan.
Based on the language of this federal legislation, Barry has to reduce his $730,000 in expenses by $83,300, which means his actual expenses were $646,700. All of a sudden, Barry’s financials show he actually made a profit in 2020, even though we all know he didn’t.
That’s right. The way the legislation currently reads, Barry now has to pay taxes on $53,000 in profit. And while that doesn’t sound like a lot – maybe he only has to pay 21% – that means he has to write a check for $11,000. And guess what, Barry is like every other small business out there, and he only has $25,000 left in his business account.
The numbers get bigger as the companies get bigger, but the reality is the government is coming back to recoup a chunk of the money most small-business owners thought was forgivable. And I can promise there are thousands upon thousands of business owners who are at the end of their ropes, are considering closing down for good, and who will opt to throw in the towel if they have to part with much more of their remaining cash.
I know this seems technical, but it’s vitally important that politicians on both sides of the aisle fix this problem. If they saddle small businesses with a tax that goes against the intent of the legislation, the loss of jobs will impact the people you know and love.
Please consider emailing your U.S. senators and representatives. Ask them to fix this legislation before even more jobs are lost.
Jonathan McElvy is the CEO of McElvy Partners. His company includes the Greensheet, The Leader, Fort Bend Star, Charlotte Media Group, Coastal Bend Publishing and Texas Printers. He has managed and owned small businesses for 20 years.