Did you take a Paycheck Protection Program (PPP) loan for your freelance business of less than $50,000? If so, the U.S. Treasury Department and the Small Business Administration (SBA) just made applying for PPP forgiveness a little easier with a simplified loan forgiveness application (SBA Form 3508S).
The new interim final rule (IFR) provides guidance on the forgiveness and loan review processes for PPP loans of $50,000 or less. It states that taxpayers with loans meeting these criteria are exempted from any reductions in forgiveness based on:
· Reductions in full-time-equivalent (FTE) employees; and
· Reductions in employee salary or wages.
Keep in mind that this form can only be used if your total PPP loan amount is less than $50,000. If you had an affiliate business and your total in PPP loans pushed you over the $50,000 threshold, you cannot use the new application form. The streamlined IFR has been introduced because borrowers with smaller loan amounts do not have to calculate FTE or salary reduction calculations. However, your freelance business will need to provide specific certifications and documentation to your lender in regard to any payroll and nonpayroll costs that PPP funds were used for.
Certification and documentation of how your freelance business used PPP loan funds are required.
According to the new form, as the borrower, you must certify that the PPP loan funds you are requesting forgiveness for only include those:
· Used to pay costs that are eligible for forgiveness (i.e., payroll costs; business mortgage interest payments; business rent or lease payments; or business utility payments);
· Includes payroll costs equal to at least 60% of the forgiveness amount;
· If a 24-week Covered Period applies, does not exceed 2.5 months’ worth of 2019 compensation for any owner employee or self-employed individual/general partner, capped at $20,833 per individual; and if the Borrower has elected an 8-week Covered Period, does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
As a borrower, you are responsible for providing an accurate calculation of your loan forgiveness amount and you must attest to the accuracy of the reported information and calculations on the loan forgiveness application. If the government believes that a taxpayer has knowingly made unqualified claims on their PPP forgiveness application, they may pursue recovery of funds and/or criminal charges.
Your lender is required to confirm receipt of the documentation that you are required to submit to aid in verifying payroll and nonpayroll costs. If applicable, the lender is also required to confirm your calculations on the loan forgiveness application, up to the amount required to reach the requested forgiveness amount.
PPP funds that are forgiven are not tax deductible
Keep in mind that according to 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.
Another important exception to this inability to deduct expenses that are covered under your PPP loan 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 is the amount of self-employment income that can be factored into your calculation of how much of your PPP loan can be forgiven.
According to the IFR, the amount of loan forgiveness that a borrower may receive cannot exceed the principal amount of the PPP loan.
The streamlined PPP loan forgiveness application will be under scrutiny.
The streamlined form is part of the U.S. Treasury Department’s effort to make the PPP forgiveness process easier, but the Department is also on the lookout for potential fraud and the misuse of funds. This means that as a freelance business owner, you should try to be as careful and accurate as possible when submitting the required certifications and documentation for your PPP loan, and be aware of the tax implications associated with the forgiveness of these funds.
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.