In this 4-minute read:
- What does the Paycheck Protection Program promise?
- How do PPP loans affect taxes for independent contractors?
- Can you write off business expenses if you used a PPP loan to pay for them?
- Things to consider with your taxes and PPP loans moving forward
More than $500 billion in forgivable loans were distributed to small business owners—including independent contractors—through the Paycheck Protection Program in 2020 to provide financial relief from the impacts of the coronavirus pandemic.
As tax season comes around, it’s important to understand the implications that the PPP loans may have on your 2020 taxes. Independent contractors, gig economy workers, people like Uber and Lyft drivers, and freelance workers will need to understand how PPP loans affect their taxes and if anything is different this year.
Note: we are not tax attorneys or financial advisors. We have made an effort to provide accurate information but you are responsible for making decisions that affect your business. Consult a qualified tax professional or business advisor.
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What does the Paycheck Protection Program promise?
Through the Paycheck Protection Program, business owners and independent contractors (including gig economy workers), are able to receive forgivable loans to help keep their businesses moving. These loans are intended to help keep individuals employed through the pandemic by providing business owners with up to 2.5 times their monthly payroll costs (or 3.5 times that for food and accommodations businesses).
IMPORTANT NOTE: On February 22, 2021, the Biden administration announced changes to the PPP loan rules that will allow anyone who files a 1040 using Schedule C (independent contractors, self-employed individuals, etc.) to use their GROSS profits, rather than their NET profits, in calculating their maximum PPP loan amount. Check our 2021 PPP updates post for the latest.
In order to receive forgiveness on PPP loans, businesses must meet certain requirements:
- At least 60% of your loan must be spent on payroll costs (and you can use up to 100%)
- Employee levels and compensation must be maintained with certain exceptions (for independent contractors this shouldn’t be too difficult)
- The other 40% of the loan must be used on approved expenses
- Rent, utilities, mortgage
- Operations expenses (software essential for business operations)
- PPE costs necessary for business
- Property damages associated with the 2020 public disturbances that were not covered by insurance
How do PPP loans affect taxes for independent contractors?
This is a question that has caused a little confusion among business owners. Business loans in general are not taxable income and are not tax deductible, but when PPP loans are forgiven, they essentially become free income.
As if this doesn’t muddy up the waters more, originally, the IRS stated that forgiven PPP loans were not taxable and that business owners would not be able to deduct any expenses that were covered by the PPP loan from their 2020 taxes.
With the passing of the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA), Congress reversed the IRS’s decision, meaning that forgiven PPP loans are completely tax-exempt and business owners would be able to write off their regular deductibles.
You will not have to pay income taxes on any amount of the PPP loan that is forgiven. And for amounts that are not forgiven, those will just be treated like any other business loan.
Can you write off business expenses if you used a PPP loan to pay for them?
Yes. This was part of the changes that took place with the CRRSAA in December, 2020. Business expenses that were covered by PPP loans can be written off like you would in a year where you didn’t have those funds.
Irv Official explains the benefits of what he calls the “PPP triple dip”
Irvin Peña, known as Irv Official on his YouTube channel focusing on helping people understand finance, business, health (and more), points out the multiple benefits that can be had from the PPP program.
One of the main goals that I have is to drive home the point to either my clients or followers watching my content is to apply for the PPP loan because it is literally FREE money when used correctly. On my social platforms I’ve often referred to this as the “triple dip”.
The money that you are given becomes 100% forgivable a.k.a. free money if you apply the 60/40 rule. Second, the money that you receive is non-taxable income meaning you do not have to pay taxes on the amount received. Probably the best part, in my opinion is that you can use a portion of the money that you received toward your tax deductions. Meaning, you are literally getting paid to keep your business afloat, expand it and receive a major tax incentive all from this one program.
Things to consider with your taxes and PPP loans moving forward
While some answers are clear, people still have a lot of questions about the implications of the PPP loans on their taxes. And it may vary from person to person, from company to company. Keep these things in mind as you move forward with your tax preparations for 2020.
Did you receive the right amount for your PPP loan?
Due to mistakes made or confusion during the application process, some people have received more than they should have qualified for. If you fall into that category, your tax situation may be different since you can only be forgiven for a specific amount—and only the forgiven amount is tax-exempt.
Find out what your state considers taxable income
Forgiven PPP loans are tax-exempt on the federal level, but you should check what your state declares about PPP loans and taxes. You may still need to report your loans to your state even if they are tax-exempt. See what we’ve found about this issue in our state-by-state PPP forgiveness tax list.
Talk to a tax professional
Most business owners have an accountant or tax professional who helps them with their taxes each year. If you don’t, now may be the time to hire someone. Find someone who is familiar with PPP loans and can help walk you through federal and state requirements for the PPP loans and your taxes.
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