Based on recent IRS guidance, any Payroll Protection Program (PPP) loan forgiveness may have a tax impact on your freelance business. How much this will impact your tax obligations depends on the extent to which you are applying for forgiveness based on overhead and other third party costs, which will not be deductible on your 2020 tax return. If you are planning to apply for PPP loan forgiveness, or you already have and are waiting for a final determination, here’s what you need to know:
As an example, if you apply for PPP loan forgiveness based on $10,000 profit on Schedule C of your tax return, or the equivalent for partnership returns, then this amount will not have a taxable impact on your tax situation because it was not listed as a deductible expense for tax purposes.
The IRS provides safe harbor for unforgiven PPP loans. The IRS also recently announced an unforgiven PPP loan safe harbor regulation for the 2020 tax year, allowing freelancers who forego requesting loan forgiveness to claim a deduction for the otherwise deductible eligible payments on an original income tax return or information return. If you believe you are eligible to receive forgiveness on your PPP loan and you plan to apply for forgiveness next year, then it is critical that you carefully consider which expenses you are eligible to deduct on your on your 2020 tax return otherwise you could end up with an unplanned tax liability.
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.
©2021 MEDOWS CPA, PLLC