People massively chased their dream and started new businesses, and that is wonderful. Then there’s the issue of large-scale PPP loan fraud.
By Wolf Richter for WOLF STREET.
The historic over-night explosion of layoffs last spring, the tsunami of free money from the government for people and businesses alike, whether they needed it or not, whether they were fraudulent or not, and people’s reactions to that free money have upended all kinds of economic dynamics. And the double-spike in applications to start new businesses is one of them.
The 440,165 applications filed in March with the IRS for an “Employer Identification Number” (EIN) were up 47% from February 2020, the last month before the Pandemic. In Q1, applications jumped by 62% from a year ago. In July last year, business applications had nearly doubled year-over-year, producing a historic spike that faded through December, then re-spiked in January for a double-WTF moment – and we’ll get into potential reasons in a moment.
This data from the Census Bureau is not based on surveys, but on actual applications by new businesses for a federal EIN, with which the IRS tracks businesses for tax purposes.
Excluded are EIN applications that are not related to typical business formations, such as EIN applications “for tax liens, estates, trusts, or certain financial filings, applications with no state-county geocodes, applications from certain agricultural, public entities, and applications in certain industries (e.g. private households, civic and social organizations).”
The job-creating machines.
From the information in the EIN application, the Census Bureau estimates which businesses have a “high propensity” of having a significant payroll (“High-Propensity Business Applications” or HBA) and might therefore become job-creating machines.
In March, there were 153,186 applications that the Census Bureau deemed to be HBAs, up 35% from February last year. In Q1, HBA applications jumped by 47% in Q1 compared to last year. That massive spike last July faded through December, but then applications re-spiked in January. Note that it took this spike to get to and surpass the number of applications before the Financial Crisis:
The real job-creating machines.
Within the HBAs are the “Business Applications with Planned Wages” (WBA). These are businesses that already have a planned date for paying wages. They have hired people and have funding in place and are ready to pay wages and grow their payroll and become significant employers.
In March, 53,213 business applications of this type were filed, up 37% from February last year. The Q1 total was up by 50% compared to Q1 last year. But note that even the huge spike in July didn’t bring applications by these job creating machines back to levels that prevailed before the Financial Crisis:
Most of the applications are by…
Read More: Applications for New Businesses Have a Double-WTF Moment