SBA Releases PPP Forgiveness Application and Makes Critical Clarifications and Documentation Requirements

From my article on Entrepreneur.com

The SBA released its Paycheck Protection Program (PPP) Loan Forgiveness Application and clarified a few critical definitions and documentation requirements in their instructions. The forgiveness application is completed by the small-business borrower and is submitted to their bank or lender whom they received their PPP loan from. The application consists of 11 lines that when calculated results in the amount of forgiveness a small-business owner will be eligible for. The forgiveness component of PPP is what attracted small-business owners to take out PPP loans in droves, as the program promised forgiveness of amounts loaned so long as the small business used the funds for payroll, business mortgage interest, rent and utilities. For a summary on forgiveness rules please refer to my prior article here.

PPP Forgivable Loans Will be Unforgiving for Many

From my article on Entrepreneur.com

Many small business owners who have been approved for Paycheck Protection Program loans (“PPP”) are realizing that the loan isn’t as forgivable as they’d hoped.

The amount a small business can qualify to have forgiven must primarily be payroll costs. The SBA’s rulemaking has stated that at least 75% of the forgiveness request must be payroll costs but can also contain up to 25% of other approved expenses under the law such as rent, mortgage interest and utilities. That rule seems to be widely understood and so long as small business owners are spending 75% of their PPP funds on payroll this rule won’t frustrate small business owners when it comes time to forgiveness.

For details on the PPP loan program in general, please refer to my prior article here.

GOP Tax Reform and Retirement Accounts

Its official: We have tax reform. But, how does it affect your IRAs, 401(k)s, 529s, Coverdells, and other retirement and education savings accounts? Let’s break down what’s new, what was proposed and didn’t make it, and what stays the same.

New Changes for 2018

There are two major changes effecting retirement, health, and education savings accounts in the bill:

1. Roth re-characterizations are dead.

Account holders will no longer be able to conduct what is known as a Roth re-characterization. A Roth re-characterization occurs when you convert from a Traditional IRA to a Roth IRA, and then later decide that you would like to go back. This helped those who couldn’t pay the tax on the conversion, or those who saw their account value go down after the conversion as they were able to undo the conversion, wait a period of time, and then reconvert and alter tax years at a lower value. The strategy will still be allowed for those who converted in 2017 and want to undo in 2018, but is unavailable after that. For my prior article outlining how the Roth re-characterization works please refer to my article here.

2. 529s can be used for K-12 private school.

College savings plans known as 529s have been expanded, and can now be used for K-12 expenses up to $10,000 per year. 529 plans remain unchanged as to college expenses, and the $10,000 cap only applies to K-12. Although you do not get a deduction for 529 plan contributions, 529 plans allow for tax-free growth and the funds can be used for education expenses. For a summary of 529 plans, and the differences between 529s and Coverdell ESAs (aka Coverdell IRAs) please refer to my prior article here.

What Was Proposed and Didn’t Make It in the Final Bill

There were a number of proposals that were part of one bill, but were removed before passing through Congress and getting signed by President Trump. These proposals include:

1. Ending Coverdell ESAs (aka Coverdell IRAs).

This proposal was part of the House bill – not included in the Senate bill – and, in the end, changes to Coverdell accounts were removed from the final bill. This is good news as Coverdell ESAs have been used by many as a means to save for their kids’ or grandchildrens’ college expenses. Similar to a 529, there is no tax deduction on contributions, but the funds grow tax-free and are used for college education expenses. The nice thing about a Coverdell, as opposed to a 529, is that you can decide what to invest the account into whether they are stocks, real estate, private companies (LLCs, LPs), or cryptocurrency.

2. Restrict deductible traditional retirement plan contributions.

There were proposals to restrict deductible traditional retirement plan contributions and to force the majority of 401(k) or other employer plan contributions to be Roth. The goal: Raise revenue now. Thankfully, these proposals never made it into the House nor Senate bills.

There were some minor hardship distribution changes for employer plans but other that the items outlined above, Tax Reform was neutral on retirement plans and savings for Americans and sometimes that’s the best you can hope for.