Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast, well he is very well known to our group. He is my CPA Tom Wheelwright. He is also you know I guess qualifies a celebrity CPA. I mean tax-free wealth, you know Rich Dad Advisor to Robert Kiyosaki, just a guy who can really explain the stuff and who knows a lot better than anybody else and we’ve had some changes recently so we got him back on because these are incredibly important issues. Tom, again, welcome back.
Tom: Hey thanks for having me Buck. Always good to be with your group. You know a number of members of your group are clients of ours and so we love your members. We love the people who are watching you and love what you’re doing in the financial education area.
Buck: Yeah and I should point out you know from the standpoint of this particular podcast, Tom is also doing this as a video as well. So what we’ll do is we’ll post the video, I mean you can always see it on YouTube as well if you’re following us there, but we’ll put it on the website as well, but if you’re listening in the car like I know a lot of you do though, you know you can go back and watch this as well. But Tom, so you know you did a webinar literally just a couple weeks ago for us that was really helpful on the latest tax legislation. And then just like that we already have some significant changes, you know some very much for the better. Do you want to give us an update on that?
Tom: I do and that’s you know why we decided to do this of course is that the big changes, there were two big changes. The primary change is this, our favorite program right now is the PPP loan right and then we had one other change that I want to get to but let’s talk about the PPP loan changes first.
Buck: Well before you actually talk about the changes can you just give it two minute you know summary of what this PPP is
Tom: Sure so it’s called the Paycheck Protection Program and it’s a loan that small businesses under that normally under 500 employees although there are exceptions to that rule normally under 500 employees can get a loan of up to ten million dollars through the SBA from their bank that is backed by the SBA so it’s a bank loan serviced by your bank it is backed by the SBA okay and the qualifications as you know but they’re really simple pretty much a pulse right everybody qualifies even though the SBA threatened people and Treasury threatened people which is probably when the worst policy comments I’ve seen in recent years. The reality is that the law is very clear that there’s no requirement frankly there’s no requirement. Now what the Treasury said was is that look if you can get capital other places, you shouldn’t be availing yourself of these loans. So for a small business that a true small business that’s everything. Okay second of all there’s a requirement for how you use the loan and you can really only use it for three things: you can use it for payroll, you can use it for and payroll includes things like contributions to 401k plans for your employees and includes things like health insurance okay so that’s payroll. Then it also includes rent and mortgage interest and includes utilities. Okay, so those are pretty much the three things. What the original cares Act said was look, you have eight weeks from the time you use the loan so you had eight weeks and the eight-week roll was from the time you received the money until you use the money. Okay, you had eight weeks to use money that the challenge, of course, is that there are a whole slew of businesses that weren’t able to use the money either because the government wasn’t allowing them to open or because they couldn’t hire employees because the employees would rather be on unemployment because the unemployment was so good. So then Congress came back and said okay what we’ll do is instead of eight weeks we’ll make it 24 weeks, and 24 weeks is significant because the reality is that if the amount of the loan was based on two and a half months of average payroll well so two and a half months that’s approximately ten or eleven weeks and you’ve got 24 weeks to use it, you’ve pretty much got to be just about out of business to not be able to use this so you’re really probably going to be able to use all of it and not have to pay any of it back, however, there were a couple of other changes. One of the curious rules that the SBA came out with was this so-called 75/25 rule and in the 75/25 rule, the SBA said you have to use at 75% for payroll and you can only use 25% of it for utilities rent and mortgage that was the original. Well, it’s actually not the original. In the original bill, there was no mention of how it was supposed to be used except for those three things. There was no 75/25 rule that this came in a regulation from the Small Business Administration. So then what Congress did this time is they said well we’re going to change that and we’re gonna make it sixty-forty all right we’re gonna make it 60/40 so 60% has to be used for payroll. One of the concerns with the way this new law was written, this revised law, it was a revision pretty much just revised as of the effective date of the cares Act right. So one of the curious parts of this is it appears in the law to be a cliff rule meaning if you don’t use at least 60% of it well you don’t get it at all. Treasury and SBA have since come out and said no we’re gonna issue new regulations and the intent is it’s the 60/40 rule will apply just the way the 75/25 rule so just be it, is just a proportionate reduction it wouldn’t be an entire disallowance right so I mean basically you know if you went off of that if you weren’t exactly at 60% maybe you used you know 50% then you just have a new baseline right for forgiveness right so so if you use 50% you know if it was you know 50/50 then you know you might lose something you’re gonna lose some percentage of the forgiveness. Now the other thing they did though is they extended the deferral. So you know if you do have any that you haven’t used up, you’ve got under the original rule you had six months before you had to start paying. Under this rule you have ten months, however you don’t have to start repaying it until your 24 weeks is up okay and so 24 weeks, by the way, it’s the earlier of 24 weeks or December 31st so I don’t know why that would even be in there because yeah because you have to get reasonably you you really have to get this loan by the end of June you know the good news is there’s still money out there in fact they’re talking about repurposing it and so because of that I mean there’s like a hundred billion dollars still sitting out there so if you have not gotten this loan now here’s something I’d really like to emphasize Buck: I have had people tell me, clients tell me, oh I’m not sure I could take this money you know are they gonna come after me and we’re talking about like even a couple hundred thousand should I should I give it back and I’m going you know what here’s the here’s the challenge and this is the challenge I had with all policy in the first place right where we’re gonna put you in prison if you you know if you if you really didn’t need it. That first of all if you’re under two million that’s absolutely not gonna happen it appears and they’re not even gonna question it, they’re not gonna audit it and second of all even if you’re over two million dollars look they would have to prove that you had easy access to capital otherwise other than here and how do we even know yet. You know the challenge is we’re seeing like I mean Arizona we’re seeing that we’re seeing more cases of Covid 19 than we did when when we before when we were shut down so we’re actually having this huge influx our hospitals are concerned about being out of beds okay, so this is you know we don’t know what’s going to happen you saw in the market today you saw this huge drop in the stock market why do you see that huge stock drop in the stock market because there’s this resurgence of Covid 19 cases and they’re very concerned that you know businesses are gonna have to close down again where even if the government doesn’t shut them down the reality is if this thing gets really bad, worse than it is now, then you’re gonna see just people hesitant to go out. I know my wife and I are as an example we’re high at risk and so we’re very hesitant to go, we would never go out to dinner in a restaurant ever right now. So you know you’re gonna see some challenges and so that’s why I say anytime you can get cash and have cash if you want to pay this back a year from now pay it back that’s fine you don’t want forgiveness you say you know what I don’t need forgiveness I’m not gonna take that government money have it available, it’s like having a line of credit I mean why would you not want to line credit which actually brings me that I want to talk if we can Buck, we have time and we like to talk about the two other loan packages that are available. Well you know once we get through the PPP here because this idea of I don’t need the money because my business is doing well is premature, it’s completely premature. We don’t know what’s going to happen yep who think the world already fell apart I don’t think we even seen that the surface scratched on how the world’s gonna fall apart, I really don’t because between the protests the looting the violence you know all of what’s going on in in the world particularly in the United States, I think we’re going to have some severe distress in the third and fourth quarter of this year. So can we can we go to one more piece
Buck: Yeah no rush at all yeah absolutely.
Tom: So this is the big one right, this is why they did it. But there’s another one that people don’t really know about
Buck: Wait, before you leave, are you leaving the PPP now? Because I have a question on that.
Tom: Go ahead:
Buck: There was one part that I know got a lot of people in social media we’re talking about which I’m wondering if has changed its the deductibility of payroll.
Tom: Oh yeah so that is not changed yet so but let me explain why it probably will change
Buck: Maybe explain what I’m talking about first.
Tom: I’m always saying Congress giveth and the IRS taketh away right and that’s pretty much what we have going on here. What happened was in the cares Act the forgiveness so forgiveness of a debt would normally be taxable income right, all income’s taxable unless the government says it isn’t. Well the government in this case said it isn’t. Here’s a specific example where the government in the law and the legislation said the forgiveness of this loan you get a two million dollar loan, that two million dollars is not taxable. The IRS in its infinite wisdom decided that if this is not taxable then that means that the payroll the utilities and the interest that allow it to be forgivable are not deductible. Now of course if you can’t deduct the expenses the net effect of that is making the income taxable right so it’s eliminating the benefit of being non-taxable because you’re not getting the deduction so what’s the point. So in the Heroes Act which is the proposed legislation by the House of Representatives, in their legislation the next stimulus bill they proposed giving back that deductibility, okay, making it very specific. The reason the IRS didn’t want to do that is because there’s a lot of nontaxable income and the general rule is if you have an expense that creates non-taxable income you don’t get to deduct the expense. Okay so that’s a general rule they didn’t want that they don’t want they didn’t want their application here kind of spoiling the whole basket.
Buck: Yeah I mean I know business owners who are holding onto their money because they don’t want to be taxed
Tom: Right oh yeah of course because you’re going wait a minute if I have to hold out 40 percent or 50 percent in California you’re talking about 50 percent tax here so you don’t really have a two million dollar loan you have a 1 million dollar loan.
Tom: So because it’s now the Senate Republican-controlled Senate has pretty much said yeah the heroes act is just a pipe dream however one of the things to notice in any I always read proposed legislation and the reason is that if there’s something the proposed legislation that the other side wants, it’s going to end up in the final legislation. And this is something the Republican Senate wants okay everybody wants this. The only reason I believe that it wasn’t put in here into this revision was because it was already in the heroes act, okay so I expect fully expect that to come through. Mnuchin said today that we’re gonna get at least a trillion dollars of stimulus in the next package which by the way has to happen by the end of June because of the unemployment running out. Okay the first part of July so you have to do this next stimulus package within the next several weeks otherwise frankly you’ve got social unrest that’s fairly significant that could be the result of people not having money in their pocket alright if you can’t eat what do you do, you go you get it somewhere yes look that’s a real issue that the government is focused on so I expect that stimulus package to happen in the next several weeks. The taxability issue should be solved we don’t know for sure but Treasury said it should they want it solved frankly they could solve it themselves but yeah you know they want to solve the reason they want Congress to solve it again it’s because they’re worried to face all but then it will apply to a lot of other things besides just the PPP. Now any other questions on PPP?
Buck: No I think that’s good let’s move on.
Tom: So there’s another piece that nobody’s talked about in this particular legislation this was the correction to the PPP. Some of you might recall that in the original Kerr’s act you could defer 50% of the employment taxes from payroll which is basically the employer share okay you could defer paying that over until the end of the year, okay unless you had a PPP loan. What this legislation did was eliminate that requirement. So you can have a PPP loan and still defer your payroll taxes. So again I would urge people think about your cash position right business is all about cash flow and think about your cash position and you’re not paying interest you’re not paying penalties. Now will I set that money aside? Absolutely I would only use it if I absolutely had to because I know that I’m going to us on December 31st. Okay but let’s for sure make sure that whatever cash we can set aside we set aside so this is a actually significant benefit if you have lots of employees because you’re talking about basically seven and a half percent right of your payroll so if you only have a hundred thousand dollars a payroll you know twice a month right that’s still half of that so it’d be seventy five hundred dollars a month and you times that by six or seven you know you’re getting to do some money that you could.
Buck: But that’s just a deferral
Tom: it’s just a postponement it’s just like it’s like having a oh my hand it’s the world’s falling apart I need cash right, you know, I mean there’s frankly there’s other things I do first before using before using that money like I would be laying off employees frankly before I used that money but I want you to know it’s there because that was a change in that law okay so there’s a possibility. So two other loans that I think and your I know you’re really familiar with at least one of them Buck, I think people should pay attention to and not discussed hardly discussed at all the first one is the EIDL Loan Economic Injury Disaster Loan okay now this is really interesting. I know a lot of people apply for a grant okay and the grant way the SBA administered that was $1,000 per employee but not not more than 10,000 okay that’s how they applied that grant so if you had eight employees you got $8,000, if you had 80 employees you got $10,000. Right so that was that grant. Now that grant if you did not have a PPP loan it’s just that it’s a grant okay so you you don’t have to worry about paying it back at all if you had a PPP loan that grant reduces the amount forgiven under the PPP it’s still not you still don’t have to pay it back under the EIDL Loan, you’re paying it back now under the PPP loan. Okay I know that’s confusing but that’s why you sit down with your CPA and walk through these numbers with them, I mean the your CPA it’s like your best friend right now CPA and banker, two best friends right now in the financial world. What I found and Buck I don’t know if you want to speak to this, but what I what in what your experience is about people you talked to, but I’m finding that the if you apply for the grant, the SBA is routinely giving out the loans and they’re offering loans and so you applied for the grant and not only did you get the grant but you’re gonna get a loan.
Buck: Well you know it’s interesting in our case and I don’t know if you’ve noticed any of this Tom, my friends in California who have businesses are getting their EIDLs and in Illinois my business friends none of us have gotten their EIDL yet.
Tom: Interesting see because I’ve gotten the ones for my business yeah they’re done be careful by the way anytime you sign a loan make sure you read the loan provisions there’s actually one provision in this loan that I’m checking out and here’s what it appears to say, all right I’m not a lawyer that’s why I’m getting it checked out. What it appears to say is that if you had this loan and how you pay it back you have to apply to the SBA if you ever take money out of your company okay that you have to actually ask the SBA for permission to distribute money from your company. So that’s a really onerous provision and frankly, if that’s the way it ends up I’m gonna say no right to this loan because I’m not gonna ask the SBA every time I want to take money out of my own company.
Buck: Yeah that’s crazy.
Tom: If it says it’s just alone anyway way with money yeah okay not distributing this money And this does have very specific uses okay you do have to use it for damage caused by the pandemic okay you can’t use it for anything right, but you can use it for PPE right I mean a lot of people are having to buy masks and stuff like that and you can use it for that. You can use it for equipment that you need to buy you know if you need to buy something for your office or you need to pay for somebody to come in and clean your office you can use it for that. So there’s a lot of things you can use that for you just can’t use it, you couldn’t take this money than go invest in a real estate okay that’s that you can’t do. So that’s actually a pretty big number because for a lot of small businesses you know what they looked at was under really a they’ll give up to two million but in the law it’s up to two hundred thousand there’s really no checking anything other than are you are you a real business. So it’s really a nice program if if you’re okay with what belongs it’s it’s a thirty year loan at 3.75 and you’ve gotten to be deal of a year on it so it’s a sweet loan.
Buck: I just wish I could get that.
Tom: It’ll come Buck, it’ll come. Okay the other loan it’s called the Main Street funding okay it was originally intended and this is a loan not from the SBA not through the SBA but from the Federal Reserve it’s actually backed by the Federal Reserve what’s going to happen is this Federal Reserve has set aside six hundred billion dollars which is as much as they set aside as treasury set aside for the PPP okay, six hundred million dollars and what the fed’s gonna do is they’re gonna go buy these loans from the bank so it’s going to go on the Fed’s balance sheet. So the fed’s taking all the risk which of course the Fed has no risk because it has no responsibility toward anybody to anybody right so it can just buy loans it’s just printing money at that point right so it’s just printing money. But it was originally intended for those businesses that did not qualify for the PPP loan however it has been expanded because nobody was taking it on. They were too worried about the restrictions so they’re loosening restrictions, they’re changing this program and this is some pretty serious funding and I would strongly suggest if you have any concerns about your cash flow that this is a loan you ought to be talking to your bank about. Should I be applying for this Main Street loan would I qualify for this mean street loan will you lend me the money. Now here’s what I learned, I learned this the hard way mm a small local bank is always your best bet always. The big banks you know with a PPP loan they were like oh we’ll take you with your Starbucks and then you know if your Starbucks then the SBA came and said no if your Starbucks you can’t do this because you’re a big company you know so it was bad with the big banks but the small local regional banks I know people that they got their PPP loans within a week in the very first week that the program was out there they got their loan.
Buck: What are the terms on that time Tom, the Main Street?
Tom: I don’t know all the terms of it mmm I do suspect though that they’re similar to the EIDL Loan. It’s a little bit going to be dependent on the bank because they do have a little bit of risk where and the in that $200,000 I deal on the bank has zero risk they have about I think they have a risk of 5% on the Main Street so they have a little risk so you know the the interest rates aren’t going to be necessarily the same all the time your terms aren’t gonna be exact I think okay I don’t know they keep changing the rules Buck and I’ll tell you what, if you’d like once the rules are fixed, we can come back and have a whole discussion about the Main Street funding. My point about this fund is there’s been a lot of disconnect with it, a lot of confusion there they’re ironing it all out so it’s really not done anywhere. So we have six hundred billion dollars sitting there. Well what I think is going to happen is that they’re gonna get that ironed out and then there’s gonna when we get this new push of the pandemic there’s gonna be a rush for it. So you know as you know Buck, the old adage is the bank will only link only lend you money when you don’t need it right, if you don’t need it now’s the time to get it. Now’s the time to get it. You have good credit still, your customers are still paying you or your tenants are still paying you whatever it is, now’s the time to get this. This is not just for employees. So unlike the PPP loan that is specific for employees or the EIDL Loan that has really super restrictions this one I think they’re gonna open it up to be a little broader in the usage though we don’t know exactly what that is quite yet.
Buck: Got it. Anything else on the on the laws and the changes?
Tom: Well those are the three big loans got okay so we got the PPP the EIDL and the Main Street. Remember you still have the standard SBA loans okay so you can get a standard SBA loan a 7A loan, you can get an emergency what they call a small loan, SBA loan that’s up to a million dollars that has a lot less restrictions on it you don’t have to collateralize your housing or your mother okay that’s actually a reasonable loan document that that million dollar loan. So there are lots of funding opportunities and I guess the the point here is is take advantage of the funding opportunities if you decide down the road a year from now you don’t need it just pay it all back. I’ve not seen any provisions in any of these loans where there’s a prepayment penalty. So take the money pay interest for a year or not depending on the deferral period and then you know if you don’t need it then pay it back.
Buck: I want to shift gears just a little bit you know because you have in addition to all the knowledge on the tax side I mean your clients you have a really good on the ground perspective of what’s going on with small business and when you look at you mentioned the stock market dipped a little bit but it also recovered about 40 percent since its March lows. What does the real world look like right now in terms of you know business people that you’re talking to?
Tom: You know a lot of it depends on your industry and your location. So you know if you’re on the East Coast you’re probably struggling, right, East Coast particularly North East is you know they’re still there reeling from 30,000 deaths in New York right that there they’re reeling from that and so they’re very, very cautious we have we have members of our CPA network in Connecticut New York and what they report is everybody wears a mask everybody does social distancing everybody’s cautious, they’re very, very careful. Contrast that with Arizona you go out for a walk and Scott in Scottsdale Arizona the bars are packed the restaurants are packed there’s no social distancing and almost no masks okay, so you’re taking your life in your hands but the businesses are open which is why we’re seeing this huge influx of cases but I think that’s what’s going on. The other part of it is here’s what’s really interesting to me is I’m a member of a of a group of entrepreneurs that primarily they’re e-commerce entrepreneurs and they’re reporting a booming business, I mean they’ve never made so much, you know from my friend Andy Tanner who sells stock market training to you know to my friends down in Austin who’s still different kinds of e-commerce you know anything that’s being sold on Amazon it’s booming right so eCommerce is one of those areas, anytime we have a crisis like this and we have a shift in the economy we have to look at where is it shifting toward, right? I didn’t tell you about I mean you were gracious enough to speak at our CPA conference just a week or two ago and we had twice as many people as we expected and a lot of that’s because we were doing it virtually right. I’m finding on my own webinars that the attendance is double what it used to be. So I think that we’re finding certain segments of the economy that are doing better and of course the bricks-and-mortar the other ones really struggling. It’s really the bricks and mortar, let me give you an interesting example of a client that owns a microbrewery and in Georgia and Georgia course is one of the first ones to open right and but in April, Georgia was closed like everybody else. They did fine yeah and the reason they did is because one of their goals was to be able to sell it in bottles so they bottled it so all they did was they just stepped up their bottling whereas I know restaurant owners here in Phoenix, where they sold it on tap and that’s what they sold. Well they were practically giving it away because they had so much beer that was just sitting there and you know beer goes flat you know that doesn’t keep forever so they were really concerned about it whereas my client in the microbrewery because they’ve made that one little shift to be able to bottle it and they do their own bottling they were able to borrow it and they had a carry-out window and drive up carry out window and they were able to do that so you know those businesses that are adapting yeah it’s just amazing how well they’re doing.
Buck: Yeah you know it’s funny it makes me think Tom to and from the standpoint of what I’m hearing about from investors and their how how things are performing for them I mean people who are invested in real estate in office and retail are getting killed even people who are doing class A or new construction multifamily are not doing nearly as well as like working-class, you know because working-class I mean should with the unemployment right now if they’re unemployed they’re making more money than they did when they were employed so you know so those assets seem to be performing really, really well oddly enough. So there is this kind of winners and losers scenario going on with this thing one last question for you though which is you know obviously you talk about how the IRS kind of its sticky hands and tries to get their piece and all of this. Do you foresee any additional legislation this year to potentially try to recover some of the Lost revenues from the more affluent for example you know stronger restrictions on perceived tax shelters you know like conservation easements and things like that, do you see crackdowns or do you see anything like that on the horizon? What do you think?
Tom: I think the crackdowns are going to come directly from the IRS. We’re already seeing it. You know anybody who has a small captive got a nasty gram from the IRS in March just as the pandemic was hitting its stride, totally unethical letter but nevertheless because you’re the IRS you can send out whatever you want and so you know we did see that and basically they said if you don’t give up your deduction your legitimate deduction we’re going to come out at you and we’re gonna basically 800-pound gorilla sitting on your head right so that was their message in that. We had a notice last fall that they were looking at auditing the owners of a conservation easement, the owners not that I mean that the the parking garden not that not the partnership which is where the valuation was done where everything came, but the actual partners in it who really had nothing to do with that valuation
Buck: How could they even do that?
Tom: Well I think I figured out where this notice, what they’re thinking from the nose well it’s speculation, but a speculation based on 40 years of experience right so my speculation is that they’re concerned they don’t know about them. So there’s this form where you have to disclose this type of an investment that basically it has some tax shelter aspects to it called the form 8886 and there I think there quite concerned that a lot of people are not reporting on that form and if you don’t use that form by the way you have huge penalties if they catch you right so you have to disclose this and I actually think that’s what they were getting after with that letter from the IRS in March was look, you need to disclose this and if you don’t disclose it we’re gonna audit you okay because we want to make sure you’ve got it well there we know you have it if you’ve got an 8886 right so there’s been no reason for them to audit you if they look at your 8886 and in the conservation easement and also your 8282 which is the charitable portion of that and they see that it’s proper okay that may be the only audit you get and it may just be a correspondence on it you might just get a letter right so I think that the IRS is absolutely going to step up its its audits okay, it’s got more money, you know is given more money a couple of times in the last couple of years it’s gotten you know increases in funding and so I do think we’re gonna see more examinations you know more aggressive behavior from that standpoint. But the reality is that you should never be taking a position that you’re not comfortable defending. If your CPA is not comfortable defending you need a new CPA.
Buck: Yeah and that brings me ultimately to you know where we’ll leave it which is listen folks there are lots of there’s a lot of information here there’s also lots of you know even what we’re talking about with captives and some of these other things if you’re in good hands I mean you can feel a lot more comfortable you know if your CPA is comfortable with things the end feels like you know you’re not doing anything wrong, you can do more stuff than with somebody who’s scared and just says I don’t know what that is and you know you can’t do that and you know all that stuff which everybody hears all the time. So I want to encourage people we have a lot of our listeners who are already working with CPAs in the Wealthability network which is Tom’s Network again that’s wealthability.com Tom anything else to add?
Tom: Yeah so we actually call this the sleep at night test. If you’re not sleeping at night because of something to do with your taxes then please call us and whatever we can do for you even if it’s not matching you up interest even if your situation doesn’t call for what we’re doing we’ll still help you any way we can so we think this is the time to really be rendering service and really you know from an educational standpoint and anything we can do we would like to do that. But do make sure what I’ve learned number one thing I’ve learned out of this whole crisis is it’s all about your team right as Kiyosaki is always saying business is a team sport, investing is a team sport and when you have a good team it’s like you know whether it’s investing in multifamily housing there are syndicators struggling right now because they didn’t know what they were doing they didn’t do a good job and they’re gonna be struggling even more once that unemployment check goes away right so this is a time when having the right people on your team is probably more important than what you know is who you know.
Buck: That’s right. Tom I want to thank you again for being on Wealth Formula Podcast as always it is a pleasure, my good friend Tom Wheelwright.
Tom: Always my pleasure. Thanks Buck.
Buck: We’ll be right back.