How policymakers can stave off another crisis for small businesses
The pandemic dealt a significant blow to small businesses. In total, an estimated 130,000 businesses closed permanently in 2020. Without more support for newly created businesses, this year could see even more closures. Based on Gusto’s data from over 1,500 entrepreneurs who started businesses during the pandemic, 160,000 businesses could close in 2021 — well above the average number of businesses that closed annually before the pandemic.
These pandemic-era entrepreneurs started businesses out of necessity — many were laid off, unemployed or lost businesses that couldn’t adapt to COVID-19. And yet, new businesses have been blocked from accessing aid programs like the Paycheck Protection Program (PPP), which disqualified businesses started after Feb. 15, 2020.
As a result of unequal access to aid, new business owners are struggling. More than one-third have taken a second job to cover expenses, while 51 percent say their business will fail within one year without additional support. That figure represents more than twice the rate of first-year business failure in previous years.
The pandemic has changed the face of business ownership. Black communities in particular are leading new business creation, and our report found that the rate of new Black-owned businesses more than tripled in 2020.
Helping newly created businesses will positively impact underserved business-owners. The risk of closure is particularly high for business owners of color — our data found that 73 percent of Black business owners and 71 percent of Asian American and Pacific Islander (AAPI) owners say they are at risk of failing within a year.
The Biden administration has demonstrated its desire to support underserved businesses, but aid won’t come quickly enough. Some new programs aim to ramp up over multiple years. New business owners need help immediately — and supporting them is crucial for an equitable and speedy economic recovery. There are four existing policies and tax credits that can be channeled to help them in the near-term.
Prioritize new businesses for American Rescue Plan (ARP) funds
President Biden’s American Rescue Plan has already earmarked $350 billion for state, local, tribal, and territorial governments to distribute as they see fit. One goal of this funding is to support small businesses hurt by the pandemic. State and local governments should prioritize newly created businesses in their distribution of ARP aid, ideally in the form of grants.
The ARP also funded a new batch of Economic Injury Disaster Loans. As the SBA prepares to launch Targeted EIDL Advance cash grants, newly created businesses should be moved to the front of the line to receive the aid they urgently need.
Incentivize state participation in the Self-Employment Assistance (SEA) program
Though unemployment overall has been trending downwards, long-term unemployment numbers are concerning. More than 5 million people have been unemployed for more than a year. Immediate action is needed to help them get back in the job market — especially as more than 20 states are pulling out of federal unemployment and as pandemic unemployment coverage is set to end in September.
SEA programs are designed to enable unemployed workers to create their own jobs by starting small businesses and continuing to receive unemployment coverage while getting these businesses off the ground. This program is optional for states and currently only five states participate in an SEA program.
Yet SEA has been shown to both increase the income of workers and reduce unemployment insurance claims, resulting in ultimate savings to the government and positive financial results for individuals.
Incentivizing more states to participate can help support new business owners and employees who have been left behind in an uneven economic recovery.
Targeted tax credits can help underserved small businesses access capital
The Providing Real Opportunities for Growth to Rising Entrepreneurs for Sustained Success (PROGRESS) Act aims to expand access to capital among small businesses owned by women and people of color through targeted tax credits. These groups have historically received unequal access to funding — women-owned businesses raised just 2.2 percent of total venture capital funding in 2020. The U.S. Chamber of Commerce reported that Black business-owners are nearly three times as likely as their white counterparts to “have business growth and profitability negatively impacted by a lack of financial capital.” What’s more, many businesses owned by women and people of color were shut out of PPP funding.
The PROGRESS Act incentivizes third-party investment in underserved businesses and provides tax credits for wages paid by newly created businesses to their first employees.
A tax amnesty program for new businesses
COVID-19 relief programs such as social security deferrals, emergency paid sick leave, and employee retention credits were rolled out in 2020 to support small businesses. However, frequent changes in legislation and delayed guidance for businesses left many owing unforeseen taxes. These businesses were desperate for a lifeline at the height of the pandemic and couldn’t wait for clear guidance on these tax credits. The result has been harsh penalties on well-intentioned and struggling small businesses.
States have introduced Tax Amnesty Programs during past economic downturns so that taxpayers can proactively report and pay delinquent tax liabilities before the government identifies the shortfall. A similar program for small business owners could help minimize tax penalties and help to save small businesses at risk of closing. At a minimum, the IRS should cease collection activity from these businesses until the agency has caught up on its processing backlog.
Pandemic-era entrepreneurs did all that was asked of them, turning obstacles into opportunity and often putting personal savings into small businesses that could help rebuild communities. They deserve a shot at success, but those that started businesses in 2020 or 2021 have yet to receive fair access to federal support. Channeling funding and tax credits to newly created businesses will boost economic recovery and support underserved business owners, their employees, and the communities they serve. There is no reason for an additional 160,000 new businesses to fail this year when programs exist to offer aid.
Jeanette Quick is head of compliance and public policy at Gusto, a payroll and benefits service that works with 140,000 small businesses. Previously, she served as senior counsel to the U.S. Senate Banking Committee, where she was lead advisor on consumer and small business finance.