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What Freelancers Need to Know About Payroll Protection Program Loan Forgiveness

The Payroll Protection Program (PPP) loan fund is now officially tapped out, but if you were able to secure an SBA loan through this program for your freelance business it is important to know how the forgiveness of this loan will work on your 2020 tax return.

First, let’s look at what are considered qualified uses for funds from a PPP loan. While you can use your loan for any business expense,  if you use it for anything other than payroll costs, mortgage interest, rent or utilities during the eight weeks after getting the loan, you’ll have to pay the loan back. Please note: On August 24, 2020, the IRS issued new guidance which reversed its decision on home office deductions. Home office deductions are now allowed as part of PPP loan forgiveness but you may include only the share of covered expenses that were deductible on the your 2019 tax filings, or if a new business, your expected 2020 tax filings.

If you are counting on having your loan forgiven, make sure you use the money for:

  • Wages
  • Commissions
  • Income
  • Net earnings from self-employment
  • Rent or lease payments for your freelance business office (note limits above).
  • Utility payments.
  • Interest on debt taken out before Feb. 15, 2020.

It is not recommended to use your loan funds for both approved and nonapproved purposes, since only the money spent on approved uses will be forgiven. In addition, to qualify for loan forgiveness at least 75% of the forgiven amount must go toward payroll costs. Additionally, the total amount of PPP loan forgiveness is capped at 100% of the principal amount plus accrued interest.

The following offers guidance on how to calculate the amount of a Payroll Protection Program Loan that can be forgiven by individuals with self-employment income . These calculations will be made on Schedule C of your 2020 tax return. Note that you must have self-employment income in order to qualify for loan forgiveness:

  • Your self-employment income based on your 2019 Schedule C will be capped at $15,385 ($100,000 x 8, then divided by 52). Be sure to exclude any sick leave amounts for which a credit was claimed under the Families First Coronavirus Relief Act from this total.
  • Rent or lease payments for your freelance business office (note limits above).
  • Utility payments on agreements entered into before February 15, 2020, to the extent the expense is deductible on Schedule C.

It is wise to calculate whether you will be able to obtain forgiveness on the total of you PPP loan in the next few weeks so you are prepared if you need to repay any portion of the loan. The loan agreement with your SBA lender will determine the repayment terms. Under The CARES Act, the maximum loan term for portions of the loan not forgiven is two years and the maximum interest rate that can be charged is 1%.

If you missed out on PPP funding and you need cash due to loss of work from COVID-19, be on the lookout for PPP 2.0 as Congress and the President are working on further lending programs.  Also  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 that the IRS continues to make changes to the guidance related to PPP loan forgiveness. For the most current information applicable to your unique situation, consider speaking with a tax professional.

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Jonathan Medows, CPA

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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