This past weekend a colleague sent me an analysis he did of the latest confusing topic concerning the government’s Payment Protection Program (PPP). In a nutshell, on April 30, in IRS Notice 2020-32 the IRS stated (or as they said, “clarified”) that no deduction is allowed for expenses paid with funds loaned to a business through the CARES Act’s PPP if payment of the expense results in forgiveness of the loan. Sounds fair, right? If you borrow money from the government, use it to pay expenses, and then the loan is subsequently forgiven, it makes sense that the business shouldn’t get to deduct those expenses. In fact, the IRS relies on section 265 of the Internal Revenue Code, a section designed to prevent businesses getting a double tax benefit.



But, let’s move beyond principles of fairness to practicality. How does this ruling affect a struggling business owner? For example, if a business receives a PPP loan of $100,000 and the loan is used to pay salaries, is the salary expense still deductible? The bottom line is that because under the PPP this transaction results in the forgiveness of the loan, the IRS notice says no, it is not deductible.

My colleague and fellow professor at The American College of Financial Services, Ross Riskin, CPA/PFS, CCFC, takes this situation and plays it out in illustration. Here is a breakdown of the scenario:

Laying Out the Issue of Deductibility

A business, I’ll call it DayCO, normally earns $250,000. DayCO pays two employees a salary of $50,000 each (plus payroll taxes) and incurs other expenses of $25,000. DayCo’s business cash flow and its taxable business income at the end of the period would both be $117,350.

Unfortunately, the Coronavirus strikes, and DayCO now only earns $150,000. The owner, Don Day, wants to stay in business, including continuing the salaries of his two employees. So, he receives a forgivable $100,000 PPP Loan, and the funds are used solely to pay salary expenses. Let’s assume the salaries are still deductible (an assumption many of us made prior to last week’s IRS Notice). Even though DayCO only earns $150,000 in business income, with the cash infusion of the PPP loan the company still has cash flow for the period of $117,350. Better yet, assuming salary deductibility, DayCO’s taxable income is only $17,350 ($150,000 minus expenses, including salaries).

Now for a dose of reality. Weeks after taking out the PPP loan, Don Day is surprised to find that his salary expense, the primary cost of doing business for DayCO, is not deductible. Now his business’s taxable income for the period will be $117,350 – equal to his cash flow. The loan forgiveness that was promoted as being tax-exempt is essentially converted to being taxable as a result of this IRS ruling. And, Don has a lot of tax to pay.

A challenge of the CARES Act, and the PPP specifically, is that sometimes the rules are being made on the fly. The above issue of deductibility is an example. The argument may not be over. Senator Grassley, Chairman of the Senate Finance Committee stated on May 1 that he believes the IRS Notice “is contrary to [the] intent of the PPP to maximize a small business’s ability to maintain liquidity, retain employees and recover from the COVID-19 pandemic as quickly as possible.” Under this pressure, could the IRS reverse itself?

For Don Day, this is more than a political debate. How this issue is resolved could factor into whether DayCO, which is Don’s source of retirement capital, will survive. Can Don really continue his business if he has $117,500 taxable income on business income of only $150,000? Or, is he just moving the time of his execution from sunrise to high noon?

The very law Congress created to help businesses survive has the potential – for some – of hastening their demise. There are several provisions in the massive CARES Act that can cause a business owner to unwittingly jeopardize his or her own retirement plans. In the example above, Don Day may find that next year DayCO is in a cashflow bind because it must pay more business taxes than anticipated. Another example I incurred recently was a business owner who was surprised to find he couldn’t continue to defer the employer part of his company’s payroll taxes. A FAQ from the IRS states that once an employer receives a decision that its PPP loan is forgiven, it can no longer avail itself of the CARES Act’s provision allowing deferred payment of the employer’s share of Social Security tax. Earth shattering? No. But, one more example of how business owners can be caught off guard and be set up for business survival problems.

What To Do About It

So, what in these crushing times should business owners be doing to protect their businesses and therefore their retirements? Here are four short-term steps that may help avoid turning government relief into financial disaster:

Treat government relief programs as part of doing business.

I come from the Midwest, where agribusiness has long worked with government programs. Farmers understand price support systems, disaster assistance legislation and government-backed crop insurance. It’s a part of their business model. Business owners who are not used to this level of interaction with the government need to learn from farmers about how to leverage this support. These owners shouldn’t look at government assistance, such as PPP forgivable loans, as welfare; they should look at it as a congressional business stimulus program that has strings attached. Learn the strings and learn how to avoid being strung up by surprises. The CARES Act provides needed support during a time of financial crisis, but the business owner needs to either learn the ins-and-outs of the rules or find someone who will help them understand what they’re getting into.

Involve your employees.

Business owners often see themselves as the one person in the company who has all the answers. The challenge with the CARES Act is that no one has all the answers because, as seen above, the answers keep changing. Right now, millions of business owners and their employees are collectively dealing with survival—both physical and financial survival. As hackneyed as the expression has become, we truly are “all in this together!” Business owners should involve employees in the process, letting them know about PPP activities, and any business survival issues that are looming. If for no other reasons, it buys time for the owner to sort through options and keep the lights on.

Have an exit plan.

Emotionally, business owners may be feeling grief. The business is their child, and now that child is ill; is suffering. But, financially the owner must approach this as a war. You may have lost the battle, but how do you effectively retreat with the least amount of casualties? For example, do you really want to get a PPP loan if you expect to have to lay off your employees, and thereby become liable for the loan? If you have to wind up the business, how do you minimize the adverse taxes from a liquidation? It is better to be thinking about these issues while the business is still operating than after it is shuttered. And, it may help preserve some of the owner’s business equity.

Especially if the business is the primary source of retirement capital, attention must be paid to exit issues, even if right now exiting is the last thing on the business owner’s mind. Consider valuations in buy-sell agreements. If a business owner has a buy-sell agreement with a partner for a pre-COVID-19 business value of $1 million, what happens if the partner dies when the business is temporarily only worth $500,000? Without addressing the buy-sell agreement’s valuation clause, the surviving business owner is still on the hook for $1 million. Now more than ever, an exit strategy must be ready.

Work on your own retirement plan.

For many owners, whatever happens to the company affects what happens to the owner’s retirement. Obviously, a loss in the business’s equity is a direct hit to the owner’s bottom line wealth. There are also benefits-related issues that may jeopardize the owner’s retirement. A 10% reduction in salaries equally affects the owner who is the CEO, as does an incentive bonus based on earnings, as does removing the company’s 401(k) match. And, if health insurance benefits are curtailed, the business owner shares the same fate as their staff. It all counts against retirement wealth.

It may be difficult to think about swimming when you can’t even breathe, but business owners who are worried about their retirement should be planning for their retirement right now. The “new normal” that’s being talked about is just a euphemism for the reality that things will be different, even after recovery.


Benjamin Franklin, a successful businessman in his own right, reminds us the old proverb, “ for want of a nail, the shoe was lost .” The CARES Act, and PPP specifically, offers some crucial relief for troubled times, but it can also set the business owner up for disaster. An unexpected lost tax deduction here; a suspended deferral there. It can all add up to cash flow challenges going forward, and without enough cash flow the business can fail. And, with a failed business, the retirement plan collapses. While the government sorts through how to deal with the pandemic, the business owner should also be planning as well. Planning not just for tomorrow’s payroll, but a future when retirement is the new normal.

This article was written by Steve Parrish from Forbes and was legally licensed through the NewsCred publisher network.

Thomas J Cooper, CFP®, CPPT profile photo
Thomas J Cooper, CFP®, CPPT
Certified Financial Planner, Fiduciary
NAMCOA (Naples Asset Management Company®, LLC)
Mobile : 352-857-7273