If you were able to get a loan under the Paycheck Protection Program (PPP) recently, you should be aware of some important follow-up guidance recently released by the IRS that 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 home office deductions, self-employed health insurance or retirement contributions for a business owner. However, if you have a free-standing office that you pay rent on or you pay health insurance or retirement contributions for employees, these can be counted as part of your PPP loan forgiveness amount.
Another important exception to this inability to deduct expenses covered by your forgiven PPP funds is self-employment income. If you received a PPP loan and used Line 31 on Schedule C of your 2019 tax return to support your loan application, this amount can be factored into your calculation of how much of your PPP loan can be forgiven.
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 would calculate the amount for which you can seek loan forgiveness 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, 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 Schedule C from your 2019 tax return to satisfy the self-employment income verification.
Be sure to watch for updates from trusted news sources, your lender, the IRS, or the SBA for more details on how applying for PPP loan forgiveness will work. 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 that any PPP amount not forgiven is loaned at 1% interest rate, with a two-year maturity period. 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 here.
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 provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com—which also features a blog and a comprehensive freelance tax guide. Please note: Due to the high volume of inquiries in regard to COVID-19, Jonathan is not able to respond to individual requests for information at this time.