PPP Loans and the Solo 401k

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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.

14 Responses

  1. 1st,.. I would LOVE to thank you for this valuable information, application link, and to better understand it, myself.
    2nd,…Please have Rachel start my SOLO-401-K asap, so we together get this business going.
    3rd..My 403-B adviser just sent me a process for Rachel to start the transferring from 403-B into SOLO-401-K…..
    4th…As soon as Miss. Rachel get in contact with me again I will forward her the documents from my 403-B Adviser…..it won’t be much but it will be a start…
    5th…I really LOVE you guys continues advising it makes me fell more conferrable and realize with your company…

    Again Thank you and have a great Eastern Day at home…..

    PS: Today was very difficulty for me and kids,.. since it was really hard to decide where we were going with grand-kids for Easter Eggs Hunting unsure of going to living-room or dinning-room plus which pajamas to were for Easter Hunting Eggs….

    Have a great time together with your Family, Friends and co-workers..

    Rufino

    1. Thank you, Rufino! We are so looking forward to working with you as well. And we love your Easter-innovation. Definitely go with the fancy pajamas 😉

      We will absolutely help you with the 403b rollover as that is very straightforward. Our team will help you prepare customized rollover documents so the 403b rollover into your new Solo 401k plan can be quick, straightforward and easily compliant. We will help every step of the way. Happy Easter and we look forward to talking more soon, Rufino!

  2. I have just applied for a PPP and looks like I’ll get accepted, but contriubted a large amount to a SOLO 401K on my 2019 taxes that don’t show on Schedule C. Should I contact the lender and try to get that amount added in?

    1. Hi Stephen, you’ll use Line 31 on your Schedule C as the net amount to determine your PPP Loan amount. Take your total figure on Line 31, divide it by 12 and then multiply by 2.5. That will be your PPP loan request amount.

  3. I am self-employed and about to receive PPP money. I am a solo practitioner and have no formal payroll.. How do I determine the amount of salary I can use each month for loan forgiveness. (I understand the rent part) Do I just write myself a check?
    Can I use Employer contribution to solo401K for loan forgiveness.

    1. Great question, Alice. We’d certainly recommend you engage your CPA and/or tax advisor to make sure you are following the rules here. These loans are meant to be forgiven, if you color with in the lines and each situation is unique. Have your CPA help you – it’s worth it! That said, you’d probably pay yourself as you normally do for the rest of the year so issuing yourself payments is in line with what you’ve done in past years. If you don’t issue yourself formal payroll, then perhaps creating pay stubs documenting these payments are meant as payroll is a good first step and again, touch base with your CPA!

  4. Will the employer contribution to a solo 401k plan in 2020 qualify for SBA PPP loan forgiveness above the sole proprietor compensation? This assumes that the business has a profit for the year (of which 25% can be contributed to the solo 401k). For example: $20k PPP loan, pay self $15k salary and employer contributes $5k to solo 401k equals $20k forgiveness. All this is done during the 8 week PPP loan period.

    1. Good question, Greg. Of course, we’d always recommend you check with your CPA and/or tax advisor to ensure you’re following the rule for loan forgiveness. The PPP program is brand new, and rules and guidance are still coming out so engage your qualified tax professional to help here. That said, once you compensate yourself (pay yourself) as a sole proprietor, if you turn around and contribute some of those funds to your Solo 401k plan, that should fall in line with PPP forgiveness guidelines.

  5. I am self-employed with no employees. Is the employer portion of my solo 401k plan eligible for the PPP loan or just the wages? My understanding is that I cannot include my employer contributions but my CPA is telling me to show the employer “match” on my paystub. I normally do not even calculate the employer contribution until I do my year-end taxes then I make the deduction and contribution in one lump sum. By the way, I make my employee contributions after I pay myself a salary each month.

    1. Hi Cecelia, great question! Your PPP Loan calculation is based on your wages. Whether or not Solo 401k calculations can be part of the PPP loan amount really depends on your business structure. We’ve written other posts on the PPP for sole proprietors that may be helpful. Check them out and let us know if you have any other questions and we’ll be here to help!

  6. I know that our PPP loan is not taxed but my question is: Does the money we pay ourselves from PPP increase the amount we can contribute to a Solo 401k? I just learned about Solo 401ks and barely missed the deadline for 2019. For 2020 my income will be much less. I’m assuming unemployment won’t count as business income to increase my potential contribution amount (I’m trying to contribute as much as humanly possible).

    1. Hi Anthony, this is a great question and one we get all the time! PPP Loan Funds (that are forgiven) are not taxable. Therefore, they aren’t part of your gross or net income. Remember, your net compensation is what determines how much you can contribute to your Solo 401k plan. So, if the PPP funds aren’t increasing your net earnings, they also wouldn’t increase your Solo 401k contributions either. And yes, you are correct that unemployment doesn’t count as business income. The great news is that we’re seeing a lot of entrepreneurs find their niche and increase their earnings by delivering valuable services during a crazy time…I hope that helps and your biz income continues to increase so you can continue to put even more away into your Solo 401k plan as well!

  7. Thanks for responding. I have one more question: If I filed my taxes a few months ago (before knowing about my ability to contribute to a Solo 401k) is there any way possible I can still contribute to a Solo Roth 401k for 2019 (considering we are now past the July 15th tax deadline and the fact a Roth 401k has basically no effect on taxes)? I saw there is a later deadline for extensions.. perhaps I can amend my already completed taxes? I already funded a 6,000 Roth OR A.
    Thank you!

    1. I’d say work with your CPA to see if you can amend the return (even if the actual numbers don’t change because Roth 401k contributions aren’t listed there). That way, you can capture your Roth Solo 401k contributions and have the “dates and numbers” work out correctly with the IRS! And yes, you can technically make contributions until the employer files his return!

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