If you were able to get a loan under the Payroll Protection Program (PPP) recently, you should be aware of some important follow-up guidance recently released by the IRS which may impact your taxes.
PPP loan forgiveness, self-employment income and your taxes
Based on the new PPP guidance available to date (which is fluid and subject to change) any expenses eligible to be forgiven from your loan amount cannot also be deducted on your taxes. This means that normally tax-deductible expenses such payroll expenses, mortgage interest, rent and utilities are not deductible on your 2020 taxes in the amount that you receive PPP loan forgiveness on them.
In addition, you cannot apply for PPP loan forgiveness on self-employed health insurance or retirement contributions for a business owner. However, you pay health insurance or retirement contributions for employees these can be counted as part of your PPP loan forgiveness amount.
How to calculate your self-employment PPP loan forgiveness amount
Here’s an example of the calculation. If you are a freelancer who had $50,000 of net income on Schedule C of your 2019 tax return, when you apply for PPP loan forgiveness (see details on this below) you can calculate the amount that you can seek loan forgiveness for as follows:
Your self-employment income allowed for PPP loan forgiveness, based on your 2019 Schedule C will be capped at $7,692.31 ($50,000 divided by 52 and then multiplied by 8). This is the amount you would submit to your lender along with any other eligible expenses that you used the PPP loan money for.
PPP loan forgiveness is not automatic—be sure you apply for it
Another important caveat in the PPP loan forgiveness equation that you should be aware of is that currently, it appears that you have to specifically request loan forgiveness by submitting a request to the lender that is servicing the loan. You will need to provide documents that verify you used PPP funds to make payments on eligible mortgage, lease, and utility obligations. As stated above, you can use your 2019 Schedule C from your tax return to satisfy the self-employment income verification.
Be sure to watch for more details on how applying for PPP loan forgiveness will work in the news media, from your lender and from the IRS and/or SBA. The mechanics of this part of the PPP program have yet to be formally detailed.
Your lender is required to make a decision on the forgiveness of your loan within 60 days. Keep in mind, any PPP amount not forgiven is loaned at 1% interest rate, with a two-year maturity period and the first payment is due in six months.
If you missed out on PPP funding and you need cash due to loss of work from COVID-19 consider looking at filing for unemployment through your state’s unemployment insurance program. More information can be found on The Department of Labor website.
Please note, the IRS continues to revise its guidance on these matters. Consulting with a tax professional is recommended for the latest information.
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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