If you have a Solo 401k, and you are a small business owner – you may be eligible from government help through the Paycheck Protection Program (PPP). The world continues to flounder in the wake of the COVID-19 pandemic and resulting economic fallout. Small business owners are some of the hardest hit. What many people don’t realize is that small businesses truly are the engine of the economy.
Small businesses employ 54.9 million people, almost 47% of the United States working force.
Because of the huge role of small businesses in our economy, the Small Business Association (SBA) is a critically important government program. It helps small business owners get loans and financial assistance so they can keep employing almost half of America.
Help for Small Business Owners
Now more than ever small business owners need help and financial support. The economy is grinding to a halt. Businesses are slowing. People are spending less money. This equates to less revenue for small business owners. In turn, this means more citizens are laid off.
When more people are laid off, more people need unemployment. The cycle truly is vicious.
In an attempt to help keep small businesses afloat, the President announced the Paycheck Protection Program (PPP) as a way to get emergency funds to small business owners. The PPP are 100% federally guaranteed loans for employers. The goal is for these employers to maintain payroll during the Coronavirus Crisis.
If you (as the small business owner) use the loan funds to maintain payroll, your loan is forgiven (for up to 8 weeks of payroll). If your business was in operation and harmed by COVID-19 between February 15, 2020 and June 30, 2020, you may qualify.
What is the Paycheck Protection Program (PPP)?
The Small Business Association (SBA) 7(a) loan program is the primary program to provide financial assistance for small businesses. The recently passed CARES Act expands the existing SBA 7(a) loan program. Because of the CARES Act, $349 billion is allocated to this forgivable business loan program. The maximum loan amount is 2.5 times average monthly payroll.
The (forgivable) loan is equal to or the lessor of 2.5 times average monthly payroll or $10 million. In other words, multiply your monthly payroll/salary/wages by 2.5 to determine your potential loan amount.
Payroll includes salary and wages, severance, healthcare costs and retirement contributions.
The loan is limited to $100,000 per employee in calculating the average monthly payroll (there are special rules for seasonal or startups).
Proceed from the loan can be used for payroll, interest on mortgage obligations, rent and utilities.
Why does a Solo 401k matter to a PPP applicant?
If you own a business or not-for-profits with less than 500 employees, if you are self-employed schedule C (and receive 1099-MISC income), you are eligible.
Additional eligibility requirements:
- Your business has fewer than 500 employees; this includes full- and part-time employees
- You own/operate a 501(c)(3) with fewer than 500 employees
- Individual who operates as a sole proprietor.
- An individual who operates as an independent contractor (1099-MISC income)
- An individual who is self-employed who regularly carries on any trade or business.
- A Tribal business concern that meets the SBA size standard.
- 501(c)(19) veterans organization that meets the SBA size standard.
Can a Solo 401k Owner Apply for the PPP?
If you have a Solo 401k, you run your own small business. This means you can apply for a PPP loan. As a Solo 401k accountholder, you might even pay yourself or your spouse W2 wages. Those W2 wages are eligible for the PPP loan.
If your Solo 401k business is a single-member LLC or sole proprietorship, you can still apply for the PPP for any wages/income you might have earned. Generally, as a sole proprietor/1099-MISC contractor, you want to look at your 1099-MISC income (or Schedule C income) from last year (or the 2019 tax year, if you’ve already filed your 2019 returns).
How do I apply for the PPP Loan?
Download the PPP Loan application from the SBA website. Then, identify a participating bank who will assign a loan number. Submit your PPP Loan application to the bank and wait for them to approve the loan and send funds.
Keep in mind banks are extremely overwhelmed with the sheer volume of loan requests. Larger banks like Wells Fargo have already stopped accepting loan applications. You might have more luck going to a smaller local bank or credit union in getting the loan. But, there are no guarantees. A lot of people need funds and there are a lot of applicants.
PPP Loan Repayment and Forgiveness
Your PPP Loan will be forgiven if you maintain your current employee count and wages. The PPP bank/lender asks borrowers for certification that loan proceeds are to retain workers and maintain payroll, or to make mortgage, rent or utility payments.
If you receive the PPP loan, the loan forgiveness is not taxable. Therefore, the money you receive in the PPP loan from the SBA is not taxable. The whole situation continues to develop. As such, we’ll have more developments when recipients apply for loan forgiveness. At that time, you’ll prove the funds were spent on qualifying costs.
What Supporting Documents Do I Need for Loan Forgiveness?
The following docs, along with a completed loan forgiveness application, may include:
- Verification of the number of employees receiving payroll, as well as pay rates prior to, and after, the PPP loan period.
- Payroll tax filings reported to the IRS and state income
- Unemployment insurance filings
- Cancelled checks verifying mortgage interest, lease, and utility payments
- Attestation your documentation is true and correct, and that the amount considered for forgiveness was used appropriately under Paycheck Protection Program guidelines.
Can I Apply for the PPP and EIDL at the Same Time?
There is a second program offered by the SBA called the Economic Injury Disaster Loan (EIDL). You cannot have both the EIDL and PPP funds at the same time. You can apply for both, but only receive funds from one or the other.
When and Where Can I Apply for the PPP Loan?
Applications for the PPP began on Friday, April 3rd (however no banks were ready to actually receive loans at that time. Only companies with W2 employees can apply in the first round.
If your business is a Sole Proprietorship, Single-member LLC, or you are an independent contractor and receive 1099-MISC income, you can apply for the PPP on Friday, April 10th. If you have a Solo 401k, then you are a small business owner. Therefore, you can apply for the PPP. Take advantage of the opportunity available during these challenging times. As more information becomes available, we will continue to update our Solo 401k clients and readers.