The Payroll Protection Program (PPP) loan fund is officially tapped out (for now), but if you were able to secure a loan through this program for your freelance business, it is important to know how 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:
· Net earnings from self-employment
· Mortgage or rent payments
· 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. To qualify for loan forgiveness, at least 75% of the loan amount must go toward payroll costs (or your self-employment income). Only 25% of the funds you receive can be used to cover utility costs, rent. 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 (calculated using a maximum $100,000 annual compensation, divided by 52 and paid for 8 weeks). Be sure to exclude any sick leave amounts for which a credit was claimed under the Families First Coronavirus Relief Act from this total.
- Payments of interest on mortgage obligations and rent payments on leases incurred before February 15, 2020, can be claimed to the extent they are deductible on Schedule C.
- 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 your PPP loan in the next few weeks, so you can be prepared if you’ll need to repay any portion of the loan. The loan agreement with your SBA lender will determine the repayment terms, but under the CARES Act, the maximum loan term for amounts that are 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 and/or adding funds to PPP. 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.
Jonathan Medows is a New York City–based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free monthly email newsletter covering tax, accounting, and business issues to freelancers on his website, http://www.cpaforfreelancers.com — which also features a blog, how-to articles, and a comprehensive freelance tax guide.