Partner with Negative Self Employment Income and PPP Forgiveness

One of the Partners in the 401k plan has negative self employment income (line 14a).  Of course, the Partner deferred to the plan.... 12,000.

I bring this up to the CPA and he is saying that while the Partnership lost money, the PPP forgiveness is creating a positive situation for the Partner.

Do I care about the PPP forgiveness and just go with the line 14a?  In this situation I could leave 6,500 catch up in the plan and 415 refund the 5,500?

Need some insight on this situation on what to do.

Thanks

Mr. Bagwell, there does not seem to be any specific guidance on this issue. The fact that the partner's self-employment income is negative, so they will have no SECA, would certainly seem to indicate that there is no Section 415 compensation, so that the contribution would violate Section 415 and potentially disqualify the plan. On the other hand, perhaps an aggressive argument could be made that not grossing up the partner's SE income hypothetically by the amount of the excluded PPP loan forgiveness violates Section 276(a)(1) of the COVID-related Tax Relief Act of 2020, as referenced in Rev. Rul. 2021-20, that "no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income [of the PPP loan forgiveness]." Code Section 108, which deals with debt forgiveness, lists certain tax attributes that do get reduced by run-of-the mill debt forgiveness (which the just-quoted PPP special rule overrides), and my guess is that that is what Congress was thinking of in Section 276(a)(1) of the above-mentioned act, but  I guess "tax attribute" as used in the act could arguably have a more generalized meaning, and arguably Section 415 compensation is a "tax attribute," and therefore in calculating it you would add back the amount of the PPP loan forgiveness. The IRS should probably address this. Would seem to me like Section 415 compensation is not a "tax attribute," but rather the Section 108 attributes are the only ones in play here.

Anyway, the CPA is probably just addressing the fact that the partner has the distributable cash necessary to make the contribution. You might ask the CPA for backup. I suspect that none of the software vendors are going to change their SE and Section 415 calculations to gross up for PPP loan forgiveness, but you might want to check with the provider of your admin software.

Bottom line, I tend to agree with you.

The PPP loan forgiveness gives the partner tax basis to take distributions and is considered non-taxable income on the tax return so it will not affect SE income.

7 hours ago, Dare Johnson said:

The PPP loan forgiveness gives the partner tax basis to take distributions and is considered non-taxable income on the tax return so it will not affect SE income.

Is it non-taxable regardless or can it optionally be treated as taxable?  We have several partnerships and sole-props who could be profitable if so, and for most the cash flow is irrelevant; but the subsequent deductions and investment opportunity would be invaluable.

The company has likely already applied for and received loan forgiveness, so Section 1106(i) of the CARES Act provides that forgiven loans are excluded from gross income for purposes of the IRC.