What’s in the 12/27 stimulus bill for freelancers and arts organizations?

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.

Illustrations by Hannah Cole

Here’s a list of provisions in the bill that are most likely to affect freelancers and creative people. (This is a selection, not a complete list. For more information, visit the Tax Foundation.)

Stimulus payments

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.

Unemployment

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.

Charitable contributions:

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 about $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 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.

More information on the #saveourstages SBA loans is available at the SBA website.

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 is meant for general information only. Please don’t act on this alone. 

How Banks Artwash the Funds that Enable Police Brutality

The art scene is directly linked to and financially benefits from one of the most violent, heinous components of racist oppression in the US: police brutality against communities of color.

National Museum of African American History and Culture (2017) (image by Mobilus In Mobili via Flickr)

The very banks that collect large fees for packaging and selling municipal debt for police brutality settlements whitewash their images by lavishly sponsoring museums, performance venues, and community arts programs.

On September 24, 2016, the National Museum of African American History and Culture opened on the National Mall in Washington, DC, to wide acclaim, with every timed-entrance ticket for the rest of the year already claimed. Founding member Bank of America soaked up the accolades. Few people knew that Bank of America, at the same time, was profiting from fees for packaging and issuing municipal bonds to investors to pay for cities’ police brutality settlements. …read more…

This article first appeared on Hyperallergic on July 15, 2020.

Some of the Art World’s Largest Donors Have Paid Millions to Squelch a Wealth Tax

A decades-long campaign by the ultra-wealthy, including the Koch, deVos, Mars, Bass, and Walton families, has successfully misinformed United States taxpayers about what the estate tax actually is and who it affects.

Image of a mural depicting Charles and David Koch, commissioned by Jeff Greenspan and Andrew Tider (photograph courtesy Eden, Janine, and Jim, via Flickr)

The Democratic candidates for the presidency — especially Warren and Sanders — have proposed establishing new “wealth taxes” to address income inequality in the US. This is an important conversation for our country to have, because income inequality is at a five-decade high now in the US, and has insidious effects on the entire population. But these proposals would be difficult to implement, and there’s concern that such taxes might even be subject to a constitutional challenge.

But before we get lost in that debate, I want to reacquaint everyone with the tax we already have on the books that addresses income inequality: the Estate Tax. A decades-long campaign by the ultra-wealthy has successfully confused and misinformed United States taxpayers about what the estate tax actually is and who it affects. Among those families are several of the art world’s biggest patrons, including the Koch, deVos, Mars, Bass, and Walton families.

So what is the estate tax? …read more…

This article first appeared on Hyperallergic on March 13, 2020.

Tax Policy Should be Part of Our Basic Civic Education

Taxes are our only mandatory civic duty. So why is tax education left out of civics?

(image courtesy 401(K) 2012’s Flickrstream)

You probably recall a school lesson in your past about our “bicameral legislature” or the “separation of powers” between our three branches of government. But did you ever get a lesson in graduated income tax rates, the personal exemption, or how freelancers pay into Social Security?

When the president tries to extract a pledge of loyalty from someone in the Justice Department, an alarm goes off about those “separation of powers,” and as a citizen, you understand a basic tenet of our democracy is being tested. But what about when states propose funding budget shortfalls by increasing the sales tax (which is one of our most regressive taxes), or politicians quietly double the threshold on the estate tax (one of our most powerful tools for fighting the widening wealth gap)? Do these actions trigger the same sense of alarm? …read more…

Translating the New Tax Bill for Small Businesses

“Am I going to benefit from the new business deduction?”

“Do I need to incorporate to take advantage of it?”

These are questions I’m hearing a lot since the passage of the massive new tax bill. Much of the worry centers around some misconceptions. So, I’d like to outline what’s in the new provision, who it affects, and why you likely don’t need to change a thing to benefit.

The most important outcome of the new tax law (officially the Tax Cuts and Jobs Act, or TCJA) was to give a large, permanent tax cut to corporations. The corporate tax rate went from 35% to 21%. Those numbers are a little deceptive, because most US corporations don’t pay nearly that rate once you factor in tax credits and loopholes. A 2016 U.S. Government Accountability Office study found that between 67% and 72% of all active US Corporations between 2006 and 2012 had no tax liability after credits. In fact, the effective corporate tax rate (a much more meaningful number) is closer to 15%. But despite the fact that most corporations don’t pay anything close to the corporate tax rate, the point of the TCJA was largely to cut that rate.

But most businesses in the US are small businesses, not large corporations. In fact, 30.2 million businesses (or 99.9% of US businesses) are small businesses, according to a government-sponsored  2018 US Small Business Administration report. About half the private workforce in the US is employed by small businesses, and more than a quarter of the small businesses are minority-owned. However, the big corporate tax cut rate did not help these businesses at all. So rightfully, Congress introduced a provision into the TCJA to create a little more parity, called the deduction for Qualified Business Income (QBI) (also known as Section 199A). This provision, unlike the corporate tax cuts, is strictly for businesses known as “pass-through entities.” (More on that in a moment.)

But first, here’s what it does: …read more…