Recently, President Biden released his proposed COVID-19 economic stimulus plan. Dubbed the “American Rescue Plan,” this proposal would amount to a $1.9 trillion total stimulus package. With that much spending, businesses are asking how they will be impacted. Specifically, how will the Biden stimulus proposal affect small business and self-employed taxes?
As such, we’ll use this article to provide an overview of this stim
ulus package. We’ll mainly focus on the tax ramifications for small businesses and self-employed individuals. Specifically, we’ll cover the following topics:
- COVID-19 Economic Stimulus Overview
- Pandemic Unemployment Assistance Extension
- Rental Assistance and Eviction Protection
- Child Care Provider Emergency Stabilization Fund
- Closing the Small Business Emergency Paid Leave Loophole
- Increased Minimum Wage
- Direct Small Business Funding
- Final Thoughts
COVID-19 Economic Stimulus Overview
The economic impacts of COVID-19 have been catastrophic. By the end of April 2020, the United States unemployment rate reached 14.7 percent. The Dow Jones Industrial Average dropped over 20 percent. In June 2020, the National Bureau of Economic Research confirmed a US recession had begun in February 2020.
In March 2020, to combat this downturn, the federal government implemented a $2 trillion COVID-19 stimulus package. Known as the CARES Act, this provided critical funding to US businesses and individuals. However, by December 2020, despite a stock market recovery, small businesses, individuals, and healthcare providers still faced significant challenges. As a result, the government passed another stimulus package, this time totaling $900 billion.
In January 2021, the economic recovery remains fragile. As unemployment remains high, and many small businesses continue to struggle. In response, President Biden has proposed a third major COVID-19 stimulus package. The American Recovery Plan proposal provides a wide variety of assistance. And, parts of this economic assistance will affect small business and self-employed taxes. In the following sections, we’ll give an overview of these tax effects.
Pandemic Unemployment Assistance Extension
Traditionally, contractors and self-employed individuals do not qualify for unemployment insurance. The March 2020 CARES Act changed this. Through the Pandemic Unemployment Assistance (PUA) program, Congress authorized unemployment pay for contractors and self-employed individuals.
These payments provided important economic support to self-employed individuals. And, the Biden proposal aims to extend this coverage. While vague on a timeline, this new stimulus calls for “increasing the number of weeks these workers can receive the benefit.” Currently, the program supports roughly 8 million self-employed and contractor Americans.
But, from a tax perspective, these recipients cannot view unemployment insurance payments as free money. Rather, the IRS considers unemployment pay taxable income. For self-employed individuals, this means planning for these taxes. Individuals can either A) pay all owed taxes with their annual return or B) request that the government withhold a flat 10% on all unemployment payments. To have funds withheld, self-employed individuals need to submit IRS Form W-4V, Voluntary Withholding Request.
Rental Assistance and Eviction Protection
As millions of Americans have lost jobs, many can no longer afford rent payments. To help these people, the new stimulus package calls for rental assistance payments and eviction protection. Specifically, the plan calls for $30 billion in rental assistance and an eviction ban through September 30, 2021. Both of these programs will have indirect tax effects on self-employed and small business landlords.
Typically, when a tenant cannot pay rent, the landlord begins eviction proceedings. This process incurs legal expenses and, potentially, vacancy-related loss of income for landlords. In theory, the proposed rental assistance will allow tenants to stay current on rent payments rather than face eviction. At tax time, landlords will not need to deduct their eviction-related legal expenses on Schedule E.
Child Care Provider Emergency Stabilization Fund
Small business child care providers have been hit particularly hard by COVID-19. For many providers, lockdowns and general economic conditions have forced them to close. For the ones still open, covering operating expenses plus personal protective equipment remains challenging.
The Biden proposal calls for a $25 billion emergency stabilization fund to assist these struggling small businesses. This fund will provide aid to hard-hit child care providers. Specifically, it will help both providers in danger of closing and ones that have already closed. For this latter group, the funds are meant to allow for re-opening.
But, how the government makes these payments to small business child care providers will impact their taxes. According to the IRS, federal grants and forgiven loans both constitute taxable income. Recognizing this, small business recipients need to account for these payments at tax time.
Closing the Small Business Emergency Paid Leave Loophole
The March 2020 COVID-19 stimulus included a requirement for certain businesses to provide emergency paid leave. This system was designed to A) help prevent the spread of the disease and B) aid sick workers. However, this program included a loophole related to the number of employees. Businesses with more than 500 or less than 50 employees did not need to provide this paid leave.
The new Biden stimulus proposes two items. First, it extends this requirement for paid leave. Second, it would eliminate this loophole, meaning all businesses would need to provide paid leave. This could have cost-prohibitive for small businesses. As a result, the proposal calls for fully reimbursing businesses with less than 500 employers. This reimbursement would come via a refundable tax credit totaling 100 percent of the paid leave cost.
Increased Minimum Wage
The current federal minimum wage is $7.25/hour. However, President Biden’s stimulus proposal increases this to $15. From an operating expense perspective, this could significantly hurt small businesses by increasing labor costs and payroll taxes.
Small businesses pay more taxes when their payrolls grow. As a result, PPP increase could reduce a small business’s tax on net earnings. Payroll represents a deductible operating expense. If you increase payroll, you decrease earnings, which ultimately decreases taxes.
Individual businesses will need to analyze how these tax and payroll effects will impact their operations.
Direct Small Business Funding
Lastly, the proposed stimulus includes $15 billion in direct grants to small businesses. Specifically, the proposal calls for more than one million grants to particularly hard-hit small businesses. Related, it calls for committing $35 billion in federal funds to states, municipalities, and non-profit financing programs. This $35 billion would be leveraged to create an additional $175 billion in small business lending and investment.
Once again, how these payments are structured will determine their small business tax impact. Additionally, grants and forgiven loans generally constitute taxable income; on the other hand, low-interest loans – not forgiven – do not. Accordingly, small businesses need to closely analyze the structure of any aid they receive.
Biden Stimulus: Final Thoughts
If you’re a small business or self-employed individual, you’ll likely have questions about how this stimulus will affect you. We want to help. At Tax Hack, we live and breathe taxes for small businesses and self-employed individuals. Contact us to set up a tax planning strategy session!