What Is CARES & Where’s The $ Coming From?
On March 27, 2020, President Trump signed into law the most aggressive program of monetary stimulus ever undertaken in peacetime. The $2 trillion economic relief package delivered one of the largest economic packages thus far, but I believe it won’t be the last.
The previous record was held by President Obama’s American Recovery and Reinvestment Act (ARRA) in 2009. The stimulus package was intended to aid in the Great Recession by spurring consumer spending and aimed to restore trust in the financial services industry.
The CARES Act (The Coronavirus Aid, Relief, and Economic Security Act) is in simple terms, an employment bill. One that benefits both employers and employees.
It doesn’t, however, provide much relief for investors—I believe that isn’t far behind, though.
What Exactly is in the Bill?
As I said, this bill is simply an employment bill that benefits both employers and employees.
The bill can be broken down into three parts for which it helps these two groups.
- Loans for Business
By now, you’ve heard of PPP or the Paycheck Protection Program which is a $350 billion program intended to provide small businesses with assistance through a federally guaranteed loan. The loans are for small businesses (those with less than 500 employees) and loans the business 2.5 times the business’ average monthly payroll. 75% of the loan is supposed to be used to fund payroll and employee benefits costs. The remaining 25% is to be used for mortgage interest payments, rent/lease payments, and utilities.
The benefit of this loan can be forgiven and essentially turned into a non-taxable grant. As of my writing, this program is out of money but will be replenished soon.
If you own a business that meets the requirements but didn’t get a loan, I suggest getting with your advisor to get your paperwork in order and ready to submit to your lender so that you are in the best position once the PPP is re-opened.
There are three other loan options available through the SBA, one which will lend up to 10 million dollars. Each of these has different qualifications, and none of them are forgivable.
You probably understand that a grant is basically a gift from the government that you don’t have to pay back. Keeping that in mind, as I mentioned above, if a business who receives one of these loans follows the guidelines they’ll be able to have 100% of the loan forgiven. Basically turning it into a grant.
The second grant offered through the CARES Act is the additional $600 per week for unemployment. This figure is on top of whatever your state currently offers per week. In Arizona, unemployment is $240 per week, at most. So someone who files for unemployment right now in Arizona would receive $840 per week for basically six months. Each state is different so if you are eligible, make sure you check with your individual state.
The final grant is the Economic Impact Payments or better known as the “Trump check.” This one-time grant provides households of up to $1,200 per adult for individuals whose income was less than $99,000 or $198,000 for joint filers and $500 per child under 17 years old—or up to $3400 for a family of four.
As most business owners and investors know, taxes can be your single largest expense. What the CARES Act provides is some tax relief for individuals. This is one place you’ll find benefits for investors as well, but it’s small.
Right now, you can borrow $100,000 from your IRA with no penalty and you have three years to repay the tax. If you’ve repaid the loan in full, then you have a tax-free loan to yourself. For those with a 401(k) you can now borrow up to $100,000 and it’s seen as a loan so it’s not taxable. But if you lose your job and have a balance on your loan, then the repayment plan for the IRA tax takes effect.
Every investor and business owner will have an adjusted timeline for the first and second estimated tax payments which are now due July 15th. One familiar benefit that was removed in the 2017 Tax Act but is now back is what is called the “net operating loss carry-back.” If the business experienced a loss from 2018-2020, they can now carry that loss back to the previous year. As always, seek professional advice on how to implement this benefit.
Where Does The Money Come From?
In my book, Conspiracy of the Rich: The 8 New Rules of Money, I write that bailouts are the name of the game. This means that the ultra-rich will never suffer as the middle class and poor do in a financial crisis. The institutions that are deemed “too big to fail” will always be bailed out. This also means that sometimes big institutions prefer financial crisis because they know they will be bailed out, and they also know they can make a lot of money from those bailouts.
Rather than ask what President Trump is going to do about the economic crisis, it is better to ask yourself, “What am I going to do?” Rather than ask if the trillion-dollar stimulus package will work, it is smarter to ask yourself, “Where does that trillion dollars come from? Is it sitting in someone’s vault?”
In very simple terms, the central banks of the world can only do two things. They are:
- Create money out of thin air, just like the rules of Monopoly allow—something they are doing today by the trillions.
- Lend money they do not have. When you borrow money from a bank, the bank does not need to have that money in the vault.
Ultimately, the debt that is created by such stimulus packages gets kicked down the road and your children’s grandchildren will be paying for it.
With each bailout, we surrender more of our financial freedom and our share of public debt grows and grows. Big government taking over our banks and solving our personal financial problems through government programs such as Social Security and Medicare is a form of socialism. I believe socialism makes people weaker and keeps them weak. In Sunday school, I was taught to teach people how to fish—not to give people fish. To me, welfare and bailouts are the purest forms of giving people fish instead of teaching them how to provide for themselves.
Editor, Rich Dad Poor Dad Daily