Funding of 401(k) using PPP loan

[Larry Starr]

3 hours ago, shERPA said:

So it would not apply to shareholders of an S-Corp, as they are not self-employed?

No, they are not self-employed. They get a W-2.  You know that; your question confuses me somewhat.  Am I  missing something? NEVER MIND

OOPS! Never mind: what confused me was the double negative.  You are correct, they are employees and their retirement allocation counts.

[austin3515]

that's exceedingly stupid.  Sounds like maybe a technical correction bill should address it either way.  To penalize someone for being unincorporated is nonsensical.

[david rigby]

"The Universe is under no obligation to make sense to you".   Neil deGrasse Tyson

The same principle applies to Congress, statutes, and regulations.

[Larry Starr]

1 hour ago, austin3515 said:

that's exceedingly stupid.  Sounds like maybe a technical correction bill should address it either way.  To penalize someone for being unincorporated is nonsensical.

That has been my argument from the evening they dropped that bomb.  We sent that same concept to the powers that be and maybe that will also be "fixed" in the next bill (if there is ever going to be agreement again between the house and senate).  The bill introduced yesterday by Nancy is 71 pages FOR THE SUMMARY of an 1800 page bill!  I read the complete summary; it was depressing.

[shERPA]

2 hours ago, Larry Starr said:

No, they are not self-employed. They get a W-2.  You know that; your question confuses me somewhat.  Am I  missing something? NEVER MIND

OOPS! Never mind: what confused me was the double negative.  You are correct, they are employees and their retirement allocation counts.

Thanks, yes you got what I was driving at.   
 

As to the Corp/unincorporated differences, yeah, it doesn’t make sense.  Cue Frank Zappa again.     If this holds maybe those who are operating as single member LLCs (disregarded entities) or LLCs taxed as partnerships should consider making an S-corp election.   Making this change just for purposes of PPP may not make sense, but if it’s something they were considering anyway....

[Mike Preston]

So............

2019 Self-employment income up to 100,000 can be used as part of the calculation of maximum amount to borrow (which is times 2.5 divided by 12 equals 20,833.33), right?

The forgiveness attributable to 2020 self-employment income (assuming annual income of greater than 100,000) is 15,385 (which is 8/52 * 100,000), right?  

EDIT: This paragraph made no sense as initially posted:  So, a sole prop without any employees would need to find $240 in other eligible payroll expenses just to be able to qualify for forgiveness of the loan amount, right?  And that assumes rent and overhead bump the forgiveness amount up from 15385 to 20833. 

So, those that normally work from home (so no rent) may not get there.

While it isn't the end of the world having the ultimate forgiveness be less than the initial loan amount (one just pays off the remainder of the loan based on a 1% rate), it is not what sole props are expecting. 

I assume that we will get guidance at some point as to exactly how one goes about establishing a self-employed's 2020 self-employment income eligible for forgiveness.

 

[Mike Preston]

7 hours ago, Mike Preston said:

So............

2019 Self-employment income up to 100,000 can be used as part of the calculation of maximum amount to borrow (which is times 2.5 divided by 12 equals 20,833.33), right?

The forgiveness attributable to 2020 self-employment income (assuming annual income of greater than 100,000) is 15,385 (which is 8/52 * 100,000), right?  

EDIT: This paragraph made no sense as initially posted:  So, a sole prop without any employees would need to find $240 in other eligible payroll expenses just to be able to qualify for forgiveness of the loan amount, right?  And that assumes rent and overhead bump the forgiveness amount up from 15385 to 20833. 

So, those that normally work from home (so no rent) may not get there.

While it isn't the end of the world having the ultimate forgiveness be less than the initial loan amount (one just pays off the remainder of the loan based on a 1% rate), it is not what sole props are expecting. 

I assume that we will get guidance at some point as to exactly how one goes about establishing a self-employed's 2020 self-employment income eligible for forgiveness.

 

bump

[Larry Starr]

18 hours ago, Mike Preston said:

So............

2019 Self-employment income up to 100,000 can be used as part of the calculation of maximum amount to borrow (which is times 2.5 divided by 12 equals 20,833.33), right?  CORRECT

The forgiveness attributable to 2020 self-employment income (assuming annual income of greater than 100,000) is 15,385 (which is 8/52 * 100,000), right?  CORRECT.

EDIT: This paragraph made no sense as initially posted:  So, a sole prop without any employees would need to find $240 in other eligible payroll expenses just to be able to qualify for forgiveness of the loan amount, right? NOT QUITE CORRECT.  HE NEEDS TO FIND THAT $240 TO MEET THE 75% CRITERIA; IF NO, HE WOULD COME INTO THE PRO-RATA CALCULATION, NOT LOSE THE WHOLE FORIVENESS!  I WOULDN'T BE SURPRISED IF THEY ULTIMATELY ADD A $240 "ADJUSTMENT" TO MAKE THIS ANOMALY GOT AWAY (THE RESULT OF 8 WEEKS NOT ACTUALLY EQUAL TO 2 MONTHS SINCE THERE WOULD BE 13 MONTHS IF ALL MONTHS HAD ONLY 4 WEEKS!).

And that assumes rent and overhead bump the forgiveness amount up from 15385 to 20833. CORRECT

So, those that normally work from home (so no rent) may not get there. QUITE POSSIBLY CORRECT

While it isn't the end of the world having the ultimate forgiveness be less than the initial loan amount (one just pays off the remainder of the loan based on a 1% rate), it is not what sole props are expecting. THOSE WHO HAVE ADVISORS WHO NOTED THIS PROBLEM WHEN THE SOLE PROP RULES CAME OUT (WE AT BOSTON TAX INSTITUTE ADVISED OUR 19,000 EMAIL LIST SUBSCRIBERS OF THIS ISSUE THE DAY AFTER THE RULES MADE IT CLEAR AND HAD A DISCUSSION OF WHETHER THE REQUEST SHOULD BE FOR THE $240 LESSER AMOUNT), ALREADY KNOW/KNEW ABOUT IT. CONTEMPLATED RULE CHANGES MAY ELIMINATE THIS (LIKE A 50% REQUIREMENT INSTEAD OF A 75% REQUIREMENT).

I assume that we will get guidance at some point as to exactly how one goes about establishing a self-employed's 2020 self-employment income eligible for forgiveness. I BELIEVE WE ALREADY HAVE, AND IT'S JUST GOING TO BE BASED OFF THE 2019 SCHEDULE C, PERIOD (as I recall, but I will double check).

 

 

[RatherBeGolfing]

Slightly off topic, but we had a prior discussion on the certification of necessity.  Two additional questions were added (5/13/20) to the Treasury FAQ on PPP.

PPP loans under 2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

 

Quote

46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

47. Question: An SBA interim final rule posted on May 8, 2020 provided that any borrower who applied for a PPP loan and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith. Is it possible for a borrower to obtain an extension of the May 14, 2020 repayment date?

Answer: Yes, SBA is extending the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.

 

[Larry Starr]

I am attaching the 4/24 SBA / Treasury guidance called PAYCHECK PROTECTION PROGRAM HOW TO CALCULATE MAXIMUM LOAN AMOUNTS – BY BUSINESS TYPE.  Particularly, take a look at Q 4 and how it calculated a partnership maximum.  Note that it does not provide for including the employee allocation in the plan attributable to the partners (which is deducted on the 1040) and it specifically references the amounts to include for retirement (and health insurance) from the Form 1065, lines 18 and 19.  Question 2 does the same for sole props with employees. 

How-to-Calculate-Loan-Amounts.pdf

[Mike Preston]

2 hours ago, Larry Starr said:

I am attaching the 4/24 SBA / Treasury guidance called PAYCHECK PROTECTION PROGRAM HOW TO CALCULATE MAXIMUM LOAN AMOUNTS – BY BUSINESS TYPE.  Particularly, take a look at Q 4 and how it calculated a partnership maximum.  Note that it does not provide for including the employee allocation in the plan attributable to the partners (which is deducted on the 1040 and it specifically references the amounts to include for retirement (and health insurance) from the Form 1065, lines 18 and 19.  Question 2 does the same for sole props with employees. 

How-to-Calculate-Loan-Amounts.pdf 72.13 kB · 1 download

Thanks.  Now we need a document that does the same thing for forgiveness calculations.

[Larry Starr]

1 hour ago, Mike Preston said:

Thanks.  Now we need a document that does the same thing for forgiveness calculations.

And that's exactly what we are expecting "momentarily".  Seriously, could happen any day now...... and it better!

[Bird]

I see the 5/13 FAQs referenced in this thread but haven't seen anyone saying that that guidance clarifies the amount of employer contributions that are allowable.  We have an accountant citing the following:

"Any retirement plan contributions paid during the 8-week covered period...count toward forgiveness, without regard to the period to which they relate or when they were earned."

It's from an unknown source and we have asked for that source.  But they are saying the FAQs essentially state that, and I don't think they do.  Any other thoughts?

[Gilmore]

I didn't see anything in those FAQs that addressed that question.

There was an article in the WSJ on 5/17 concerning expected changes to the program, including reducing the 75% level for payroll related expenses so that small businesses that were unable to rehire employees and need the money can use more of it towards rent, for example.

Am I too naive in thinking that if this does happen it might relieve some of the need to use the funds for retirement plan contributions.

Has there been any changes in the IRS position that forgiven amounts are not deductible?

Thanks.

[shERPA]

If you look at the loan forgiveness application, the instructions for line 1, at the bottom of page 1, say to enter the amount of payroll cost incurred or paid during the covered period. And on the PPP Schedule A Instructions it says enter the total amount the employer paid. AFAIK that is the extent of the guidance, at least for now.  Probably the best thing to do is quit talking/asking about it and leave things as they are.  But that won’t happen of course.  I’m telling my clients if they have the cash available and are going to contribute anyway, plan to fund their plans sufficiently to get 100% forgiveness, but don’t be surprised if later guidance limits the employer contribution. And wait until they are near the end of the eight weeks to see if more guidance comes out in case something changes that would disrupt this approach.

https://www.sba.gov/sites/default/files/2020-05/3245-0407 SBA Form 3508 PPP Forgiveness Application.pdf

[Larry Starr]

2 hours ago, Bird said:

I see the 5/13 FAQs referenced in this thread but haven't seen anyone saying that that guidance clarifies the amount of employer contributions that are allowable.  We have an accountant citing the following:

"Any retirement plan contributions paid during the 8-week covered period...count toward forgiveness, without regard to the period to which they relate or when they were earned."

It's from an unknown source and we have asked for that source.  But they are saying the FAQs essentially state that, and I don't think they do.  Any other thoughts?

For once, the accountant is right!  Maybe he read our Forbes article from this weekend (link below). I've also attached the 16 page manifesto we (four of us) wrote for LISI and for which there is a webinar this afternoon. The webinar registration link is in the first paragraph if you are interested.  It's an hour and half presentation.

 

Here's the link:

Here is link to an article that was published in Forbes over the weekend on the new PPP forgiveness application.

 

https://www.forbes.com/sites/alangassman/2020/05/16/sba-gives-ppp-borrowers-good-newsforgiveness-application-and-instructions-are-borrower-friendly/#6775cc963210 

 

LISIGassmanKetronStarrCameronPDF5_18_2020.pdf

[Larry Starr]

51 minutes ago, Gilmore said:

I didn't see anything in those FAQs that addressed that question.

There was an article in the WSJ on 5/17 concerning expected changes to the program, including reducing the 75% level for payroll related expenses so that small businesses that were unable to rehire employees and need the money can use more of it towards rent, for example.

Am I too naive in thinking that if this does happen it might relieve some of the need to use the funds for retirement plan contributions.

Has there been any changes in the IRS position that forgiven amounts are not deductible?

Thanks.

We have no idea what changes will occur; we can get changes from SBA, IRS, or Congress.  Lots of different things are being talked about, including increasing the 8 weeks to 24 weeks; not starting the counting of the time until 60 days after all restrictions on the business are lifted; and others.  The expectation is that we are going to get some relief (they really have to; PPP just does not accomplish what it was supposed to for, for example, restaurants, dental offices, and lots of others).

As to the deductible amount, opinion is unanimous that this will change before the year end; Congress (both houses, both parties) have written to Treasury to change it. The house bill has that change written in to it.  IT WILL CHANGE, but it hasn't changed yet. Stay tuned......

[RatherBeGolfing]

S.3612  Small Business Expense Protection Act of 2020 is the Senate bill that drafted to make "fix" the IRS position.

[Larry Starr]

46 minutes ago, RatherBeGolfing said:

S.3612  Small Business Expense Protection Act of 2020 is the Senate bill that drafted to make "fix" the IRS position.

Pelosi's $3Trillion house bill passed by the house late last week also has this correction.  IT WILL HAPPEN.

[RatherBeGolfing]

2 hours ago, Larry Starr said:

IT WILL HAPPEN.

Agreed.  Not sure whether the house bill or senate bill are more likely to pass at this point though.

[Larry Starr]

42 minutes ago, RatherBeGolfing said:

Agreed.  Not sure whether the house bill or senate bill are more likely to pass at this point though.

Neither; there will be a compromise that is very different than both of those bills, IMHO.

[austin3515]

So today on Derrin Watson's Fireside Chat through ERISApedia he said that the 2019 contributions can be funded in the 8 week window and count towards the loan forgiveness.  Has anyone seen an article that goes through these rules in detail?  He also said you could fund the 2020 profit sharing to a suspense account for allocation after year-end.    I'd love an article from an FIS or a Groom Law or Sal Tripodi, etc. that can give us something reliable in writing that we can then use to counsel people and have it as comfort that the premiere experts have opined.

[RatherBeGolfing]

59 minutes ago, austin3515 said:

Has anyone seen an article that goes through these rules in detail?

Ive seen opinions both ways.  Im not sold on the suspense account solution, at least not to the point of suggesting or mentioning it to clients.  Considering the implications if forgiveness is denied, I'm not going there.  

[austin3515]

Thats what is so frustrating.  The stakes are incredibly high.  We need something more concrete.  I'm not even comfortable assuming that the reference to "paid or incurred" is intended to extend so far as to include the 2019 contributions.  a literal interpretation, sure.  But it just seems so outside the scope of the plain intention (i.e., the plain intention is clearly focused on those 8 weeks).  Is it "impossible" for them to come back at this stage and say the retirement contributions have to relate to the 8 week period?  I feel like we're not at a point yet where that is out of the question.

And I keep getting questions about defined benefit plan contributions.  I can;t imagine they are not eligible, but some more guidance would sure be nice.  Is it too much wishful thinking to assume we will get more guidance on this?   

[Mike Preston]

2 hours ago, austin3515 said:

Thats what is so frustrating.  The stakes are incredibly high.  We need something more concrete.  I'm not even comfortable assuming that the reference to "paid or incurred" is intended to extend so far as to include the 2019 contributions.  a literal interpretation, sure.  But it just seems so outside the scope of the plain intention (i.e., the plain intention is clearly focused on those 8 weeks).  Is it "impossible" for them to come back at this stage and say the retirement contributions have to relate to the 8 week period?  I feel like we're not at a point yet where that is out of the question.

And I keep getting questions about defined benefit plan contributions.  I can;t imagine they are not eligible, but some more guidance would sure be nice.  Is it too much wishful thinking to assume we will get more guidance on this?   

Read the article Larry Starr posted.