PPP Loan Forgiveness and the Solo 401k

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So, you’ve received funding from the Paycheck Protection Program (PPP). But, now what? How can you follow the guidelines to ensure your PPP Loan Forgiveness? If you don’t follow the rules, you will need to pay the funds back, which isn’t the end of the world. But, if you follow the rules, the SBA will forgive your PPP loan. You read that right.

Your PPP loan forgiveness means you won’t have to pay the funds back to the Small Business Association (SBA). There are many questions that remain on complete forgiveness of the loan. However, guidance is coming out that is helpful for small business owners and independent contractors with questions.

Read the Fine Print

Small business owners started receiving the first PPP loan funds around April 5th. That means the next couple weeks is the first “due date” for PPP loan forgiveness, or for small business owners to start repaying loan funds.

The SBA has been clear from the beginning that your loan funds must be spent in a certain way to qualify for PPP loan forgiveness. You must spend at least 75% of received funds on payroll expenses to receive PPP loan forgiveness. Spend the remaining 25% on mortgage payments, utilities, and interest. Remember, the point of the PPP loan is to help employers retain their employees. If you are self-employed, the point of your PPP funds is to keep you off unemployment. Keep that in mind when receiving funds, and spending them in your business operations.

Pay Attention to Timing for PPP Loan Forgiveness

When did your funds hit your bank account? That starts the clock ticking on when you need to use the funds for business operations. That means you don’t simply want to keep the funds sitting in your business bank account. The point of the PPP Loan program is to get money into the hands of small business owners who need it. If you received funds, use them for payroll expenses (at least 75% of what you received). Use the remainder for interest payments, mortgage payments, and utilities.

You have to pay yourself and use the PP funds within 8 weeks of receiving the money from your bank and the SBA:

Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction… costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). (Source)

Solo 401k Contributions Not Part of the Equation

As a self-employed person, you qualify for a Solo 401k plan. If you are a sole proprietor or independent contractor, your business earns money and you receive payment.

According to the SBA, “For an independent contractor or sole proprietor, payroll costs only include wages, commissions, income, or net earnings from self-employment, or similar compensation.” (Source)

That also means there is no forgiveness for retirement or health insurance contributions if you are self-employed. If you received PPP funds, you cannot simply contribute those funds to your Solo 401k. They must be considered part of your payroll/salary/wages. That’s because Solo 401k contributions are paid from your net compensation. Your net self-employment income is after the reduction made for retirement plan contributions. And remember, it’s the net compensation you used to determine your loan amount for the PPP.

So, presumably you must pay yourself (in full) from PPP loan funds, and from there work with your CPA to determine if any other funds can be used to contribute to your Solo 401k plan.

Complete the Application

The PPP Loan Forgiveness application from the Small Business association can be found here. Work with your CPA to complete the application in full. Ask your lender what specific documentation they require to process full forgiveness of the PPP loan. The application contains comprehensive instructions for completion.

Work with Your Lender

The US Chamber of Commerce released comprehensive help on PPP Loan forgiveness. Hopefully, this guidance will make it easier for a small business owner to complete the loan forgiveness application completely and correctly. Once you submit the PPP loan forgiveness application, your banker has 60 days to make a decision.

If the banker agrees your loan should be forgiven, the SBA pays the banker the funds you were loaned within 90 days. If your banker determines your loan should not be forgiven, a repayment schedule will be created. Remember this is a tough job for your banker, too. They want to follow the rules so the SBA pays them for the funds they lent out to businesses. It’s a confusing time for everyone involved.

Keep Good Records

You must keep records of your PPP loan for at least 6 years. This is important even if the SBA completely forgave your loan or if you repaid in full. Maintain a set of signed application documents, receipt of funds, and how you spent those funds. And, keep a copy of your submitted SBA application to your lender. It’s important you keep good records because the SBA expects to conduct routine “checks” the borrowers were truly eligible for the funds. If the SBA determines that you were not really an eligible borrower, none of the loan is forgiven. You will be expected to repay funds in full.

If you have to repay your PPP loan, you have 2 years to do so. There is a maximum 1% interest rate, and you may defer loan repayments for up to 6 months. There are no prepayment penalties or fees.

There’s Still Money Left

As of May 21st, the SBA had allocated approximately $512 billion of the total $659 billion available in the PPP program. That means there may still be money left. If you are a small business owner, independent contractor, or self-employed person then you may qualify. The retirement experts at Nabers Group began covering the PPP Loan program upon its inception:

It’s not too late. If you have been affected by the Coronavirus global pandemic, there is a chance for your small business to receive a forgivable loan from the SBA. Work with your banker, and submit your application soon.

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