Sched. C Reflects a Loss

Hi,

Client's Sched. C reflected a loss. Unfortunately he maxed out his 401k so it will have to be refunded. The accountant came back asking if the non-taxable PPP income that the client received last year could be included.

I'm pretty sure I know the answer but wanted something in writing.

PPP funds granted were loans.  I don't believe loan proceeds (whether PPP or not) are ever taxable income, unless debt forgiveness rules apply in the case of loan proceeds not repaid by the borrower.  Congress specifically exempted forgiven PPP loans from the debt forgiveness income inclusion rules if I recall correctly.  If the funds are not includable in income, then the receipt of the funds does not give rise to net earnings from self employment.  My opinion isn't authoritative (I'm a CPA and simply stating how I would handle a client in the same situation).

Salary deferrals can only be made from Section 415(c) compensation. See 1.401(k)-1(e)(8).  For the self-employed, 415(c) compensation is earned income. See 1.415(c)-2(b)  (2).  If the client doesn't have any earned income, there can't be any deferrals.