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PPP loans and deductible employer plan contributions

“My client received a Payroll Protection Program (PPP) loan for his small business to help cover payroll expenses. He maintains a safe harbor 401(k) plan, and each year my client makes an annual lump sum contribution to the plan. The company will make its 2019 contribution in 2020, and the timing will be such that the contribution will be after the business received the PPP funds and during the 8-week loan forgiveness period. Can the business use some of the PPP loan to make the contribution and deduct the full amount of the 401(k) employer safe harbor contribution?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to the PPP loan.

Highlights of the Discussion

This question can only be fully answered by your client’s tax professional and/or CPA.  The following response provides some general information on the topic based on the guidance issued to date. It’s for informational purposes only and cannot be relied upon as tax advice.

As it stands now, the IRS appears to take the position (in Notice 2020-32) that if a business uses the PPP loan for eligible expenses that would otherwise be deductible, the business cannot also take the tax deduction. That would be double dipping because the PPP loan, once forgiven, is not taxable income to the business. Consequently, that would mean if a business uses PPP funds to make employer contributions to a retirement plan as an eligible expense, and the PPP loan is forgiven, the business could not also deduct the employer contributions under Internal Revenue Code Sec. 404. Please see page 6-7 of Notice 2020-32 for a formal discussion.

There are some policy makers in Congress (e.g., Senate Finance Committee Chair Chuck Grassley, R-Iowa and House, Ways and Means Committee Chair Richard E. Neal, D-Mass) who are seeking to make changes to the IRS’s apparent stance on this tax issue. Therefore, it is important to watch for additional updates on this ever-evolving question of deductibility, and seek competent tax advice.

Conclusion

The various forms of Covid-19 relief granted to businesses and individuals come with myriad questions. Patience will be needed as answers trickle in, as well as the services of tax experts.

 

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