Last Updated Monday, March 15, 2021
Here are important details about the Paycheck Protection Program (PPP2), EIDL grants and other assistance for small businesses and the self-employed signed into law in December 2020. (Note this article does not address any provisions of the $1.9 trillion Stimulus bill President Biden signed into law on March 11, 2021.) Read below for information about PPP loans for the self-employed and small businesses, PP2 loan forgiveness, the taxability of PPP loans and the continuation of the EIDL loan program.
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The $900 billion stimulus package that was signed into law in December, 2020 included a number of provisions to help small businesses and the self-employed. There are several key components of the legislation, including the renewal of both Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans, as well as other provisions which can help your business if your income has been negatively impacted by the pandemic. However, you should also 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 and small business can expect from a tax perspective with this new round of COVID-19 funding:
PPP Loans for the Self-Employed and Small Businesses
There is more than $284 billion allocated for forgivable “PPP2” loans with a reduction in the amount available from $10 million to $2 million.
- Freelancers who did not receive a PPP loan before are eligible to get funding in the new round.
- If you have a business that did get PPP funding before and you have eligible expenses you may have another chance to get this funding, but only if you meet these criteria:
- 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.
Changes in Taxability of PPP Forgiveness Amounts and EIDL Grants
There is very good news about PPP loan forgiveness for the self-employed and for business owners: 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.
Grants for Theater and Cultural Industry Workers
- If you work in the live theater, art or other cultural industry the $15 billion grants included in the bill provides funding for live venues, theaters and museum operators that have lost at least 25% of their year-over-year revenues. The tentative details are that an initial grant can total up to $10 million per eligible business. A second grant, worth half the amount of the first, may also be available. This money must be used for payroll costs, rent, utilities and personal protective equipment.
Extended Unemployment Benefits and Meal Deductions for Freelancers
- There is an allocation for $300 per week (for a period of 11 weeks) for enhanced unemployment insurance benefits—and self-employed individuals remain eligible to collect unemployment—with the knowledge that these funds are considered taxable income.
- The bill also restores the 100 percent business meals deduction for two years to help the restaurant industry.
New and Existing EIDL Grants
- Congress announced another $20,000,000,000 in emergency EIDL grants (advances) in the new stimulus bill. The CARES Act passed in March 2020 included a grant for those who applied for an EIDL loan, in the amount of up to $10,000. The SBA later determined that those grants would be made in an amount of $1000 per employee.
- The new legislation clarifies that EIDL grants are not taxable, that businesses who receive them will not be denied a tax deduction for qualified expenses paid for with those funds, and that EIDL grants will not be deducted from PPP for loan forgiveness purposes. This applies to all EIDL grants, including those already received.
- Economic loss is defined as “the amount by which the gross receipts of the covered entity declined during an 8-week period between March 2, 2020, and December 17, 2021, relative to a comparable 8-week period immediately preceding March 2, 2020, or during 2019.” The SBA will come up with a formula for seasonal businesses.
Some important points about EIDLs if you are considering applying for one for your freelance business:
- Businesses that applied for an EIDL in 2020– and meet the qualifications— may receive the full $10,000 grant (minus any amount already received) even if their EIDL applications were not initially approved.
- To qualify for the full emergency $10,000 EIDL grant, you must:
– Be located in a low-income community, and
– Have suffered an economic loss greater than 30%, and
– Employ not more than 300 employees
- In addition, the business must qualify as an eligible entity as defined in the CARES Act:
– A small business, cooperative, ESOP Tribal concern, with fewer than 500 employees*
– An individual who operates under as a sole proprietorship, with or without employees, or as an independent contractor; or
– A private non-profit or small agricultural cooperative.
– The business must have been in operation by January 31, 2020
– The business must be directly affected by COVID-19
The Small Business Administration (SBA) has set the deadline to apply for new EIDL loans at December 31, 2021. The SBA must now issue guidance and instructions for applying for the new EIDL grants.
There are likely to be further changes to the guidance regarding the latest stimulus bill, 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.
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 other than his active clients, but he is happy to take tax-related service inquiry phone calls.
About the Author
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. His website, www.cpaforfreelancers.com features a blog, how-to articles, and a comprehensive freelance tax guide.
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