Responding to a question from a Massachusetts financial advisor, ERISA consultants at the Retirement Learning Center Resource answered a common question related to Paycheck Protection Program (PPP) loans.
ERISA Consultants at the Retirement Learning Center Resource regularly receive calls from financial advisers on a wide range of technical topics related to IRAs, Qualified Pension Plans, and other types of Retirement Savings Plans. We bring you Case of the Week to highlight the most relevant topics affecting your business.
A recent call from a Massachusetts financial advisor is representative of a current investigation related to Paycheck Protection Program (P3) loans. The counselor asked:
“My client received a PPP loan for his small business to help cover his salary expenses. He maintains a 401 (k) safe harbor plan and considers whether the company can use part of the PPP loan to pay the contribution and deduct the full amount of the employer’s contribution to the 401 (k) safe harbor )? “
Highlights of the discussion
This question can only be fully answered by your client’s tax specialist and / or CPA. The following response provides general information on the subject based on the guidance published to date. This is for informational purposes only and cannot be taken as tax advice.
As for the first question, we have confirmation (of IRS Q&A 7 of the FAQ on general loan remittance and row 7 of Annex A of the PPP of the revised loan forgiveness request) that the parts of the pension contributions provided by the employer (either defined contribution or defined benefit) are considered “eligible labor costs” and may be taken into account for loan cancellation if incurred or paid during the Covered Period or the Alternative Payroll Coverage Period and certain other criteria. Employee salary deferrals are excluded for this purpose.
Note that salary costs incurred during the covered period or the covered period of the alternative payroll and paid after the covered period or the covered period of the alternative payroll can still count towards the cancellation of the loan if they are paid on or before the next regular pay date after the period covered or Period covered by the alternative payroll.
For each employee, the total amount of cash compensation eligible for pardon may not exceed an annual salary of $ 100,000, prorated over the Covered Period. Be aware of the special cap on business owner (i.e., owner-employee or self-employed / general partner) compensation that applies in determining loan cancellation ($ 20,833 per person at total in all companies in which it has an interest during the 24-week period, or $ 15,385 if an 8-week period is chosen). Also, the treatment of pension plan contributions made on behalf of these business owners depends on the type of business entity (e.g. C-Corp, S-Corp, Independent, LLC, etc. Please see IRS Q&A 8 of the General Loan Discount FAQ for more details).
As for the question of deductibility, before the promulgation of the 2021 Consolidated Finance Law, the IRS has taken a position (in Notice 2020-32 and Decision on revenues 2020-27) that if a business uses a PPP loan for qualifying expenses that would otherwise be deductible, the business could not also benefit from the tax deduction. This would be a double deduction because the PPP loan, once canceled, is not taxable income for the business.
This position has changed under the Consolidated Credit Act of 2021. Canceled PPP loans will not be included in taxable income, and expenses paid with the proceeds of a canceled PPP loan are tax deductible. For example, the employer’s contributions to a pension plan that are used for the cancellation of the PPP loan are also deductible by the company. The change covers not only new loans, but also existing and past PPP loans, reversing previous IRS guidelines, which did not allow deductions on expenses paid with PPP proceeds. In addition, any increase in the income tax base resulting from the borrower’s PPP loan will be maintained even if the PPP loan is canceled.
The history of PPP loans for small business owners who receive them continues to evolve, making regular contact with a tax advisor essential. A new amendment to the law affects the deductibility of employer contributions to pension plans that are applied to the cancellation of PPP loans.
Any information provided is for informational purposes only. It cannot be used for the purpose of avoiding penalties and taxes. Consumers should consult their tax advisor or lawyer about their particular situation.
© 2021, Retirement Learning Center, LLC. Used with permission.