by Hannah Cole of Sunlight Tax
During the last gasp of 2020, Congress passed, and the President signed, a stimulus bill. While major new legislation is expected to pass in the early days of the Biden administration, the 12/27 Congressional stimulus bill is on the books now.
Here’s a list of provisions in the bill that are most likely to affect freelancers and creative people.
Stimulus payments of $600 per taxpayer plus $600 per dependent under 17 will be sent out to the bank account you have on file with the IRS. Otherwise, you will get the money as a paper check or prepaid debit card. The full payments will go to single taxpayers with income under $75,000, $112,500 if Head of Household, and under $150,000 if married filing jointly. The payment is phased out $5 for every $100 dollars of income above this range.
You can go to IRS.gov/account to check the amount of your expected stimulus payment. Technically, this payment is an advance on a credit on your 2020 taxes. What this means is that if you had household/income changes during 2020 that have not yet been reported on your taxes, you will still get the money, but as a credit when you file your 2020 tax return (instead of immediately). For example, if you had a baby in 2020, you will get the $600 for that baby as a tax credit when you file 2020 taxes.
Happily, if your circumstances improved in 2020, and you received a payment that you actually wouldn’t be eligible for based on your 2020 taxes, there is no clawback provision. You get to keep the money.
Lastly, these stimulus payments are not taxable.
The enhanced unemployment benefits from the CARES act that expired have been reinstated, but at a lower dollar amount. Federal unemployment assistance--which gets layered on top of state unemployment payments--will be $300 per week through March 14 2021. For workers who have both wage and self-employment income but whose usual unemployment calculation doesn’t consider the self-employment income, there is an additional $100 per week in Federal Unemployment benefits. Workers with at least $5,000 in self-employment income may qualify as part of the Mixed Earner Unemployment Compensation.
Federal unemployment benefits are extended for an additional 11 weeks.
Federal and state unemployment benefits are taxable income at the Federal level. Most states also tax unemployment benefits, but there are some exceptions.
For 2020 and 2021, charitable contributions will be allowed as a deduction for taxpayers who take the standard deduction (normally charitable contributions are only deductible if you itemize). The limit for contribution deductions is $600 for Married Filing Joint couples, and $300 for all other filing statuses. Remember that itemized deductions are totally separate from business deductions. The largest itemized deductions are generally state and local taxes, mortgage interest, and charitable contributions if those are quite large. Itemized deductions tend to be taken only by relatively high income individuals who are homeowners and live in high-tax states.
Meals deductions for businesses
For 2021 and 2022 only, businesses may deduct 100% of their business meals as a business expense (normally this deduction is only for 50% of the actual expense). The meal must be provided by a restaurant. Takeout meals are allowed. Hopefully this will provide extra incentive for more spending at restaurants that need the business.
Changes in education credits/deductions
The tuition and fees deduction expired and was not renewed.
However, the income limits on the Lifetime Learning Credit were increased. Now, the Lifetime Learning Credit phases out for taxpayers with income above $80,000 single or $160,000 married filing jointly (an income increase of $21k/$42k respectively). This phaseout limit now matches the American Opportunity Credit.
A few random changes:
Mortgage forgiveness is excluded from income until 2025. (Under normal circumstances, mortgage forgiveness is treated as taxable income.)
The reduction of the medical expense deduction floor from 10 percent to 7.5 percent of adjusted gross income will now be permanent. For context, before the 2018 Tax Cuts and Jobs Act, medical expenses were only deductible for taxpayers who itemized, and then only those expenses were deductible that exceeded 10% of their adjusted gross income. This meant that in 2017, if you itemized deductions and had medical expenses of $13,000 and an adjusted gross income of $100,000, that your medical expense deduction would be $3000 [ie $13,000 - (10% x $100,000) = $3000]. In 2018, with the floor lowered temporarily to 7.5%, the same calculation would yield a deduction of [$13,000 - (7.5% x $100,000) = $5500]. This 7.5% floor is now permanent.
Flexible Savings Account (FSA) balances can be rolled from the 2020 tax year into 2021, and 2021 balances can be rolled into 2022. Normally, taxpayers lose the unused value of an FSA balance after the end of the year. This provision will help retain unused balances for expenses like childcare, which would otherwise be lost.
Paycheck Protection Program (PPP)
Congress included language in the bill to allow deductions with forgiven PPP money. This clarifies a dispute between Congress and the IRS over whether expenses paid for with forgiven PPP loans could be deducted.
Forgiven PPP debt, per the original CARES Act, is not taxable as income.
Streamlined forgiveness of PPP loans of 150k or less
The new stimulus bill provides for streamlined forgiveness of PPP loans of $150,000 or less. This is not automatic forgiveness, but rather a reduction in the paperwork burden. A business loan will only get 100% forgiveness if it actually qualifies for forgiveness.
The loan forgiveness form will be no more than 1 page in length. The borrower must say how many employees they retained, and they must show the “estimated amount” spent on payroll. The Small Business Administration has 24 days from 12/27 to come out with this paperwork.
The legislation also eliminates the prior requirement to reduce the PPP forgiveness by the amount of Economic Injury Disaster Loan (EIDL) advances.
We don’t yet know details of how this will work.
PPP Round 2
There are some additional guidelines for new PPP loan applications - including rules for borrowers applying for a second PPP loan, as well as new borrowers. Loan applicants making their second application:
Must have fewer than 300 employees
Must have 25% or more decline in revenue in any quarter in 2020 compared to the same quarter in 2019
For applications filed before the end of 2020, they can only use Q1, Q2 or Q3. If the application was filed in 2021, they can use Q4 of 2020.
Have already used (or will use) all of their first PPP loan
Can show a 25% reduction or more in gross revenue in any quarter in 2020 compared to 2019
The calculation for determining the loan amount remains the same, but an increased amount is allowed for borrowers with a NAICS code beginning with “72” - ie the restaurant and hospitality industry. To review, the original PPP loan calculation is:
Payroll divided by 12 times 2.5. Borrowers with NAICS codes starting with 72 (essentially restaurants) can take payroll times 3.5.
To illustrate, if a taxpayer had payroll of $100,000 in 2019, their loan amount calculation would be:
$100,000/12 = $8,333. $8,333 x 2.5 = $20,8333. So the maximum loan amount for that taxpayer would be $20,8333.
It that same taxpayer were a restaurant, the calculation would be: $8,333 x 3.5 = $29,165.50.
The maximum loan is now $2 Million (down from $10 Million in round one).
Borrowers can use either 2019 payroll or payroll for a one-year period before the loan date. The application deadline is March 31, 2021.
$15 Billion in Shuttered Venue Operators Grants, (aka Save Our Stages)
Lastly, $15 Billion dollars has been earmarked for loans to shuttered venue operators to be granted directly through the Small Business Administration (SBA). The grants will be specifically for eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate at least a 25 percent reduction in revenues.
The application rollout will begin in stages, with eligible entities that have faced a 90% loss or more being allowed to apply first, then 14 days later, grants open to entities having faced a 70% or greater loss, and after that, all eligible entities allowed to apply. Applications have not yet been released by the SBA, but it will be important for eligible entities to gather paperwork ahead of the deadline and be ready to apply immediately.
BIO: Hannah Cole is an artist, speaker, and tax professional empowering thousands of fellow creative people with clear financial information and tax preparation. She is the founder of Sunlight Tax. Follow her on Instagram @sunlighttax
DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.