QUESTION:
I’m a sole prop. I received funding from PPP loan. Any insight into whether this money can be used for solo 401k contributions? I know the loan can be forgiven from being paid back if used for “payroll”. I’m unsure if the loan will be income and therefore allow me to make solo contributions.
ANSWER:
No guidance has yet been issued by IRS or the Treasury Department on this provision of the CARES Act. Specifically, there has not yet been any specific guidance from the IRS regarding being able to take a deduction for contributions made to 401k plans including self-employed solo 401k plans from the loan amount stemming from the CARES Act’s Paycheck Protection Program. We will provide more information on our website once the IRS releases guidance.
The last guidance we know of is found in IRS Notice 2020-32 where the IRS concludes that business expenses that are used to obtain forgiveness of a PPP loan are not deductible for tax purposes. This seems to mean if the PPP funds are used toward making the profit sharing contribution to the solo 4o1k plan is not tax deductible even though it would be applied to the pretax solo 401k bucket. What is more, profit sharing contributions can never be made to the Roth solo 401k or voluntary after-tax bucket.
From the bank and SBA side, we can’t address what the bank and SBA may (or may not) require related to retirement plan benefits and the payment of those benefits to the solo 401k plan. As far as being able to include in the debt forgiveness amount any contribution amount that you make to the solo 401k plan from the PPP loan amount, you would need to coordinate it with the bank that processed the loan and the SBA.
It would seem the “payment of any retirement benefit” would include contributions (e.g., employer profit sharing contributions) related to compensation paid during the 8-week period following the PPP loan. It does not appear that an employer can fund an entire year’s contribution and consider that to be a “payroll cost” for this purpose.
