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
Under the new PPP guidance, 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.
An 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