We now have both the new clarity and an easy road to Paycheck Protection Program (PPP) loan forgiveness for the self-employed with no employees.
New Easy Road to 100 Percent Forgiveness
Say thanks to the Paycheck Protection Program Flexibility Act of 2020. This new law creates a 24-week period for you to spend your PPP loan proceeds. If you obtained your loan proceeds before June 5, you can elect to use the eight-week period to spend your PPP loan proceeds.
Here’s the big difference:
Why Is This Important?
When you file as a Schedule C taxpayer and have no employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31, net profit, limited to $20,833.
You may have your loan proceeds either in hand or in play at this point.
(If you have not yet applied for your PPP loan, do so now. Lawmakers recently reopened the program with an eye on using the remaining funds. Under this new law, the extension of the PPP loan program will last until the earlier of August 8, 2020, or the day the funds are exhausted.)
Let’s keep our eyes on the “easy road” to forgiveness. Under the new 24-month rule, you achieve 100 percent forgiveness when you pay yourself the total loan amount within 10.8 weeks of the date you received your loan proceeds. Let’s round the 10.8 to 11 weeks.
Yes, you are reading this correctly. By simply using the loan proceeds on yourself during the first 11 weeks, you achieve total forgiveness.
Note this. By using the 11 weeks, you achieve total PPP loan forgiveness without having to spend any money on rent, utilities, or interest.
If you would like to discuss this PPP forgiveness rule with me, please don’t hesitate to call us at -833-438-2937.
Next Blog: When Can I Apply for Forgiveness?
When Can I Apply for Forgiveness?
According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.
Example. You receive your $20,833 PPP loan on May 15, 2020. You put the money in your business checking account. During the 11 weeks beginning with May 15, 2020, you write checks to yourself that total $20,833. You can apply for $20,833 of loan forgiveness anytime beginning week 11 or later.
Is It Really This Easy?
What About Interest, Rent, and Utilities?
With the 11-week program described above, you don’t have to consider interest, rent, or utilities to achieve 100 percent forgiveness. In fact, why bother? By simply using the 11 weeks, you have less paperwork and worry.
Of course, you might want to consider interest, rent, and utilities if this takes you to earlier forgiveness. To obtain full forgiveness, you could spend as little as 60 percent on payroll and the balance on interest, rent, and utilities.
Example. You file a Schedule C and have no employees, and on June 1, 2020, you obtain a PPP loan of $20,000. During the first eight weeks, you spend $12,000 on yourself and $8,000 on qualified Schedule C deductible business interest, rent, and utilities. You can elect the eight-week period and qualify for 100 percent forgiveness.
Here are the basic PPP forgiveness requirements that apply to your 2020 Schedule C business deduction payments for interest, rent, and utilities:
Meet the Paid Rule
On page 2 of the 3508EZ instructions, you find this:
Enter any amounts paid to a self-employed individual. For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.
We may suffer from unfounded paranoia because we find the word “paid” a word to be reckoned with. So, in our opinion, you should have your Schedule C business write you checks from its business account. If there’s no separate business account, make sure the business writes checks that pay your personal expenses in the amount of the deemed compensation.
With the CARES Act, Congress decided to waive all 2020 required minimum distributions (RMDs).
What if you already took out your annual RMD before Congress changed the law?
The IRS just granted you brand-new mercy to fix the issue, but you need to take action before August 31, 2020.
2020 RMD Waiver
The CARES Act waived all 2020 RMDs for IRAs and defined contribution plans. This waiver applies to your RMD if you
Let’s say you did not know about the waiver and you took your RMD. You want to put it back and avoid paying taxes on it. You have two ways to undo your 2020 RMD:
Indirect rollover. You generally have 60 days from the distribution date to complete an indirect rollover. But in Notice 2020-51, the IRS extends this indirect rollover deadline so that you have until August 31, 2020, for RMD distributions you took earlier in tax year 2020.
As a reminder, you can’t do an indirect rollover from an inherited non-spousal IRA. Instead, to avoid being taxed on your RMD, you have to use the repayment method.
Repayment. You can repay the RMD to the original account by August 31, 2020, and pay no tax on it. And when you make this repayment under Notice 2020-51, it doesn’t count as the “one” indirect rollover per year that you can use.
Important note. These rules apply only to RMD amounts distributed (taken out of the IRA). Any amounts you took out exceeding your RMD amount aren’t eligible for relief.
Example. Ann had a $4,000 RMD requirement for her traditional IRA for tax year 2020 and took out $5,000 on January 15, 2020.
Jo-Ann has two options, However, Ann must pay tax on the $1,000 she took above and beyond her RMD amount.
The August 31 date is coming soon. If you would like my help with your RMD, please don't hesitate to contact us.
If the federal tax you pay is dependent on where you are physically located, then COVID-19 likely has thrown a wrench in your physical tax location (and tax situation).
If you were living abroad and had to return to the U.S. because of COVID-19, you may wonder if you’ll have a big tax bill for failing to meet the foreign earned income exclusion requirements.
If you are a non-resident alien who got stuck in the U.S. because of COVID-19, you may be worried that the IRS will consider you a U.S. resident for tax purposes—thereby allowing Uncle Sam to tax your worldwide income.
Here’s good news. The IRS has provided relief in both circumstances, if you qualify.
Foreign Earned Income Exclusion
The tax law gives you a huge tax benefit if you live or work abroad, which allows you to exclude a significant amount of your income from federal tax. In 2020, the maximum exclusion is $107,600 per person plus an additional amount for foreign housing costs.
To claim the exclusion, you need
You’ll still be a qualified individual for the foreign earned income exclusion if you had to leave the foreign country because of war, civil unrest, or similar adverse conditions that precluded the normal conduct of business.
The IRS has ruled that COVID-19 is an adverse condition that precluded the normal conduct of business as follows:
To use this relief procedure, you had to
The period covered by this relief ends on July 15, 2020.
Exclusion Relief Example
Joe is present in the United Kingdom from January 1, 2020, through March 1, 2020, and expected to work in London for all of calendar year 2020.
Due to COVID-19, Joe leaves the United Kingdom on March 2, 2020, then returns on August 24, 2020, and stays for the remainder of 2020.
Joe is a qualified individual for the foreign earned income exclusion for the following periods:
Because Joe has 188 qualifying days in the calendar year period, his maximum foreign earned income exclusion in 2020 is $55,270.
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.