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By: John “Jack” Kiley, CPA, CISP


As the second tranche of Paycheck Protection Program (PPP) Loans draws to a close and the Country begins to open for business, the Government deserves some credit. The program was bold and with good intent (as many government programs are), but that is usually as far as it goes. Although the initiative was not without fault, by most accounts, those who jumped on it early, had good financial records and a reasonably good banking relationship were rewarded at least in the second tranche. The Government also moved quickly and reasonably effectively (the last time I remember something of this scale was the Healthcare rollout and the Government had more than a year to prepare).

Now that businesses are in the process of receiving the cash, attention turns to what the process is going to be to get all, or at least a portion, of the PPP Loan forgiven. Virtually all banks, who are the conduits for these loans, have put out documentation regarding the loan forgiveness. We encourage you to discuss this with your bank because we have observed variation from one bank to the next and you’ll want to be sure you are complying with whatever your bank’s process is.

The IRS issued guidance recently (Notice 2020-32) regarding the tax implications of the PPP Loans. Although it was understood, and in fact touted, that the forgiveness of the loans would not be includable in income (as forgiveness of debt generally is includable in income), the IRS guidance stated that the expenses forgiven under PPP would NOT be deductible either. Without boring you with code sections, this follows a long-held position that if an expense was allocable or incurred for the production of tax exempt income, it is not deductible for tax purposes. In other words, you aren’t allowed to ‘double dip’ (exclude the income and deduct the expense).

Our bet is many business owners were not thinking this far ahead. Stated differently, in your tax projections, you will need to reduce your expenses by the amount of PPP Loan forgiveness you receive when projecting taxable income. This means that unless you have netted out expenses against the projected loan forgiveness, you are probably understating your 2020 income. This could be particularly tricky in projecting cash flow needs as we approach the July 15th filing deadline. July 15th is going to be a painful day with respect to cash flow. You will need to settle up on the 2019 tax bill, fund retirement plans/IRAs/HSAs and the like AND pay first and second quarter estimates for 2020. Then, in 60 days, the third quarter estimate is due September 15th. That could be a lot of cash; and, to boot, much of this hinges on what happens between now and July 15th in your business, which is completely unknown.

As if this isn’t complicated enough, Congress is trying to ride to the rescue—at least on the PPP Loans. Many members of Congress, including both the chairmen of the House and Senate tax committees (from different parties and probably not friends philosophically speaking), have indicated that IRS’ position in Notice 2020-32 was not the intent of the CARES Act legislation. Congress’ intent was not only to exclude the debt forgiveness from income but also to allow taxpayers to deduct the expenses. Although both parties seem to agree on this, Congress can only talk about it (and they do that a lot). But in order to do something legislatively, they need to be in session and who knows when that will happen. If Congress does act on this, they will most likely do what they usually do—talk, wait, run around, pass something at the last minute and leave town.


So, where does this leave the small business owner? In short, the answer is with a bit of a mess and needing to make some assumptions as well as short term decisions. So here is a quick ‘to do’ list:


1. Figure out your tax position for 2019. The sooner you find this out, the better you will be and you may have options. For many, 2019 was actually a good year income wise which means it is a ‘bad’ year tax wise. Knowing this now is helpful.

2. Consider moves you can make now to lower your 2019 tax bill. For most, this might be IRA and HSA contributions. If you have a retirement plan sponsored by your business in place prior to 2019, you might want to consider fully funding the plan to lower your 2019 tax (if you don’t have a plan in place, your only avenue here is to establish a SEP). If you’re older than 59 ½ or will be shortly, this may be particularly attractive to you because you can fund the plan now and pull out money as you need it without penalty. This will have the effect of giving you a deduction for last year (2019) and not having to pay tax until 2021 (when you filed your 2020 return) on the distributions you take out this year to live on. With a little luck, the amount(s) you distribute will be less than what you contributed. Also, 401k plans now have expanded loan provisions and other plans, as well as IRAs, have mechanisms to ‘re-contribute’ COVID-19 related distributions. There were many changes and new options made available in the CARES Act so talk to your CPA or plan administrator for more information.

3. Turning to 2020, now is the time to look into your crystal ball, make some assumptions and try to figure out where your business will end up this year. My suggestion is to build yourself a spreadsheet to help you because you are going to be reworking these numbers fairly frequently as you refine your assumptions. You might want to prepare a couple ‘what ifs’ regarding the PPP Loan forgiveness discussed.


Now that you are armed with all this information, what do you do? In times of uncertainty, cash is king so your primary focus might be on preserving cash. Those of us who have been through tough times (banking crisis, 9/11, etc) learned that our funding sources dry up quickly in uncertain times and banks are not our friends. With this in mind, you have two action points:


The first is you need to deal with 2019. If you owe a small amount or are in a refund position, great. Move on to 2020. If you owe a lot of money for 2019, you might consider borrowing from the Feds. What I mean by this is, if you owe less than $50k, you are up to date on taxes, and you do not have an outstanding balance to IRS, you can pretty much set your terms and you won’t even have to talk to anyone. You’ll be able to do it by telephone as long as the monthly payment you request pays off the debt within five years. IRS will charge interest and assess late payment penalty, but this may be a cheaper cost of funds than other available sources (if any). If things turn around and your cash flow eases, just pay it off.

Next turn to your 2020 estimates. You’ll want to look at this on a quarter by quarter basis. Many tax preparers (us included) set the current year estimates to the safe harbor amounts and set up even payments over the course of the year. Two things here. First, for most businesses, income is not earned evenly over the course of the year. Second, the estimates can be paid based on the income earned during that quarter. This is referred to as annualizing. So where in past years it may have been expedient to just pay the same amount for each quarter, this year might be different. Just to compound the issue, the IRS’ quarters are not what you might think (Q1 Jan-Mar; Q2 Apr-May; Q3 Jun-Aug; Q4 Sept-Dec), another reason to develop a spreadsheet. Our expectation for most people is that the second quarter will be extremely low and the third quarter probably not much better. If you miss a little here the penalty is not huge. Although it is called a penalty, it’s interest charged based on the difference between the estimated payment you should have paid (based on actual income for that quarter) and the estimate you actually paid for the number of days outstanding. The current IRS interest rate as of this writing is 5%. Once again this is cheap money.


As you map out your strategy and plan out your cash flow for the remainder of the year, a couple things should become apparent:


1. Most likely, you are going to spend more time on this than you have in the past. If you have a process already in place, things will be easier. If you don’t have a process in place or you don’t spend a lot of time planning, you will struggle. Don’t be afraid to call your advisors and ask for help or insight.

2. Be on the lookout for a definitive resolution on the PPP Loan forgiveness issue, although this might not be resolved until very late in the year. For some, this could be a big variable so you need to be prepared (especially if you guess that Congress will codify the expenses as deductible and they do nothing or acquiesce to IRS’ position).

3. You and your CPA may become better friends. You will want to understand all the implications of borrowing from IRS, contributing/distributing/borrowing/repaying retirement plans, the quarterly estimate penalty and how to ‘layout’ your quarterly income in order to annualize for your 2020 estimates. Your CPA will be the best (and least expensive) source of information.

Although these past few months have been a wild ride and the rest of the year isn’t going to be a cakewalk, each day things come a little more into focus. While things may never go back to the way they were, following the action points outlined here might bring you a little sanity and clarity of thought.