The recently passed $900 billion stimulus package is now law. There are several key components of the legislation, including a new round of funding via Paycheck Protection Program (PPP) loans, which can help your freelance business if your income has been negatively impacted by the pandemic. However, you should be aware of how participating in these programs (now or if you accessed them previously) may impact your freelance taxes.
Here is an overview of what freelancers can expect with this new round of “PPP2” funding and how it may impact their taxes.
Who is eligible for the new round of PPP2 loans?
Under the new law, first-time borrowers from the following groups can apply for PPP funding:
· Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans
· Sole proprietors, independent contractors, and eligible self-employed individuals
· Not-for-profits, including churches
· Accommodation and food services operations with fewer than 300 employees per physical location
If you already received a PPP loan, a second round of forgivable PPP loans are available, but only if the following additional eligibility rules are met:
· The business employs no more than 300 employees per physical location;
· The business has used, or will use the full amount of its first PPP loan; and
· The business has experienced at least a 25% reduction in quarterly revenues in at least one quarter of 2020, as compared to the same quarter of 2019.
How will a PPP loan affect freelance taxes?
There is very good news for freelancers who have PPP loans: The Payroll Protection Program (PPP) loan forgiveness amount will not be considered taxable income at the federal level.
This could be a significant tax saving for your business. However, there is not any change in the guidance for state and local tax treatment of PPP funds. Therefore, be sure to check with your own state and local tax authorities for additional information.
In addition, the new bill allows the deduction of business expenses paid for with forgiven Paycheck Protection Program loans.
There are likely to be further changes to the guidance regarding the latest stimulus bill and PPP loans, so please watch for further updates. However, regardless of any changes to specifics of these provisions, it is imperative that you always keep appropriate documentation of all funds received and how they were spent for tax purposes.
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.