The Paycheck Protection Program created an analytical problem that divorce financial professionals have been working through for the past several years: how to treat the forgiven PPP loan proceeds when calculating a small business owner’s gross income for purposes of alimony, child support, and equitable distribution. The CARES Act produced an unprecedented combination of benefits — the loan proceeds were forgiven if used appropriately, the forgiven amounts were non-taxable, the U.S. Treasury effectively paid for certain business expenses, and businesses could deduct expenses the Treasury had paid. For a small business owner with PPP exposure, the period from 2020 through 2022 produces tax returns that look different from any other period of the business’s history.
For the Divorce Financial Coach producing an income analysis on such a business, the question is whether the PPP-affected years should be treated as anomalous (and excluded from the historical average), whether they should be included with the PPP funds added to gross income, or whether the years should be included but with the PPP funds excluded. Each approach produces materially different results. Case law is just beginning to develop, and the handful of decisions that exist provide useful guidance without settling the question definitively.
What follows is a working framework for Divorce Financial Coaches and family lawyers handling income analysis on businesses with PPP exposure. It covers the structural benefits PPP provided, the analytical framework that distinguishes normalization from windfall, two worked examples showing when each treatment applies, the emerging case law, and the operational adjustments to the income analysis workflow.
Why PPP creates a distinct analytical problem.
The goal of an income analysis is to present a realistic expectation of a party’s earnings based on their historical income. Most Divorce Financial Coach practice on this question is well-developed: experts work through depreciation, fringe benefits, personal expenses run through the business, normalization of owner compensation, and the various other adjustments that produce a defensible gross income figure. State case law and guidelines provide the framework for most of the recurring questions.
PPP introduced a new variable that the existing framework does not directly address. The program was a $790.9 billion loan program established in 2020 under the CARES Act with the goal of providing qualifying small businesses with the financial resources to weather the global economic shutdown. The program provided loans that the business could use to maintain payroll, rehire laid-off employees, and cover certain overhead expenses (utilities, rent, insurance).
Congress went further than a standard loan program. The forgiveness mechanic provided that if the funds were used to cover applicable expenses during the covered period, the loan would be forgiven. Any forgiven PPP loan amount was deemed non-taxable income. Businesses were also allowed to deduct the expenses paid with the forgiven loan proceeds, reducing their taxable income even further. The combination produced four distinct benefits: the funds were forgiven, the forgiven funds were non-taxable, the Treasury effectively paid the business expenses, and the business could still deduct those expenses.
For an income analysis, this means a business with PPP exposure can show substantially lower taxable income in PPP-affected years than the business’s actual economic performance would suggest. The reported income on the tax return does not capture the economic value the business received through the PPP. The expert’s analytical question is whether to adjust the tax-reported income to reflect the economic value, exclude the affected years entirely, or take some other approach.
The funds from the PPP were available in two allotments, commonly called draws or rounds. The first round capped loans at $10 million. The second round capped loans at $2 million. Both rounds produced the same forgiveness benefits. A business that received PPP in both rounds may have substantially distorted reported income in both 2020 and 2021.
Normalization versus windfall — the analytical framework.
The instinct of many financial experts is to exclude PPP funds from the income analysis on the basis that they are non-recurring income. The instinct is incomplete. The relevant question is not whether the PPP funds were recurring; they obviously were not. The relevant question is whether the PPP funds normalized earnings (in which case they should be included to produce an accurate picture of the business’s actual operating income) or produced a windfall (in which case they should be excluded as an extraordinary event).
Normalization means restoring the income figure to what the business would have earned under normal operating conditions. For many businesses, the pandemic produced a real disruption to revenue — restaurants closed, retail operations restricted, travel-related businesses devastated. The PPP funds offset some of the pandemic-driven revenue loss. Adding the PPP funds back to the business’s gross income approximates what the business would have earned in a non-pandemic year, producing a normalized figure that better reflects the owner’s ongoing earning capacity.
Windfall means the PPP funds produced income beyond what the business would have earned in normal operations. For some businesses — particularly essential businesses that did not experience pandemic-driven revenue loss but still qualified for PPP — the funds were genuinely additional income that the business would not have received in a normal year. For these businesses, including the PPP funds in the income calculation overstates the owner’s normal earning capacity.
The distinction between normalization and windfall is fact-specific and requires the expert to evaluate the actual revenue picture of the business during the PPP-affected years against the business’s historical and projected revenue trajectory. A general rule of thumb — include if normalizing, exclude if a windfall — is correct, but the application requires judgment grounded in the specific business’s financials.
Worked example one — the electrical business where PPP normalized.
Consider an electrician who is the sole owner of a local electrical business. The business’s annual gross income over the prior five years runs roughly as follows: 2018, $300,000; 2019, $310,000; 2020, $165,000 (pandemic-driven revenue loss); 2021, $310,000; 2022, $315,000.
The 2020 revenue loss is clearly attributable to the pandemic. The electrical business depends on residential and small commercial work, much of which was deferred when homeowners and businesses restricted access during the shutdown. The 2020 result is an outlier that does not reflect the owner’s normal earning capacity.
A five-year historical average without adjustment produces an average gross income of $280,000. The figure is distorted downward by the 2020 outlier.
Now assume the business owner received $135,000 of PPP funds in 2020, which were subsequently forgiven. Adding the PPP funds to 2020 gross income produces $300,000 for that year — bringing 2020 in line with the surrounding years and producing a normalized 2020 figure consistent with the business’s actual non-pandemic earning capacity.
The five-year average with PPP funds included rises to $307,000 per year. The $27,000 increase relative to the unadjusted average is nearly ten percent. In an alimony or child support calculation, the difference is material. The PPP-adjusted figure better reflects the owner’s ongoing earning capacity and is the appropriate input to the support calculation.
Worked example two — the restaurant where PPP produced a windfall.
Consider a restaurant owner who converted the restaurant’s dine-in model to a take-out model during the pandemic, expanding into food trucks and pop-up events. The creative and timely pivot allowed the business to maintain revenue through the pandemic period rather than losing it.
Assume the owner’s annual gross income runs as follows: 2018, $215,000; 2019, $225,000; 2020, $311,500 (revenue maintained through the pivot); 2021, $235,000; 2022, $245,000.
The 2020 result is already above the surrounding years even before considering PPP. The business actually performed better than its baseline during the pandemic because of the successful pivot. Now assume the owner also received $75,000 in PPP funds in 2020. Adding the PPP funds to the 2020 income produces $386,500 for that year — a substantial outlier well above the business’s normal earning capacity.
In this case, the PPP funds did not normalize the 2020 income; they amplified an already-strong year. The PPP funds are a true windfall — additional income the business would not have received in any normal year. Including them in the historical average overstates the owner’s ongoing earning capacity. The appropriate treatment is to exclude the PPP funds from the income analysis.
The choice between the two treatments turns on the same business’s actual revenue performance during the PPP-affected period. The electrical business lost revenue and the PPP restored it; the restaurant maintained or grew revenue and the PPP added on top. The two cases require opposite analytical treatment despite both involving PPP funds, both involving small businesses, and both involving similar magnitudes of PPP receipt.
Emerging case law on PPP funds in divorce.
The determination by courts of whether PPP funds should be included in gross income in family law cases is slowly emerging in a handful of states. Two reported decisions illustrate the analytical approaches the courts are using.
In March 2023, the Vermont Supreme Court addressed the issue in Griggs v. Griggs, 22-AP-186 (Vt. Mar. 10, 2023). The case involved dueling financial experts on whether PPP funds should be included in the income analysis. The court ultimately found that PPP funds should be included in gross income. The decision relied on the analytical framework that PPP funds, despite their loan-and-forgiveness structure, functioned economically as business receipts that contributed to the owner’s overall economic position.
In May 2022, the Appellate Court of Connecticut addressed the issue in Bialik v. Bialik, 215 Conn. App. 559, 283 A.3d 1062 (Conn. App. 2022). The Appellate Court reversed the lower court’s judgment and determined that PPP funds and Economic Injury Disaster Loan (EIDL) funds should be included within the definition of adjusted gross earnings, since they constitute gross business receipts. The court reasoned that PPP and EIDL funds are virtually indistinguishable from ordinary business receipts, differing primarily in their extraordinary dual tax-favored status.
The Connecticut court cited a 2020 article in the Journal of American Academy of Matrimonial Lawyers (“Changing Tax Laws and Support: Keeping Up as the Ground Shifts,” 33 J. Am. Acad. Matrim. L. 159) that addressed a PPP loan of $100,000 and its treatment as income in a divorce matter. The article noted that the reality is that the business has $100,000 more of cash flow — that the financial shot in the arm of additional cash flows does not change the bottom line for tax purposes but for cash-flow purposes could have an impact. Based on this reasoning, the Connecticut court found that PPP and EIDL funds should be included in the calculation of the obligor’s adjusted gross earnings.
Both decisions found in favor of including PPP funds in the income calculation. Neither decision explicitly addressed the normalization-versus-windfall distinction, but both involved facts where the PPP funds appeared to function as normalizing income rather than as windfalls. The analytical framework articulated in this piece — include when the funds normalize earnings, exclude when they produce a windfall — is consistent with the case-law outcomes to date and provides the working basis for analysis until more decisions accumulate.
Operational complications in the analysis.
Several operational details complicate the PPP income analysis.
First, the PPP loan forgiveness may appear on tax returns in a different year than the funds were spent. The forgiveness may appear in the year the money was spent, the year the application for forgiveness was submitted, or the year the forgiveness was granted. As a result, PPP forgiveness may appear on more than one year’s tax returns or may not align with the year in which the money was actually deployed. The expert needs to trace the PPP funds to the year they affected business operations, not just the year they appeared on the tax return.
Second, the PPP forgiveness may not appear on the tax return at all in the conventional sense. Because the forgiven amounts were non-taxable, they may show up only in a footnote or supplemental schedule rather than as a line on the primary return. The expert needs to look beyond the conventional income lines to find the forgiveness.
Third, businesses received PPP funds in two distinct rounds (2020 and 2021). The treatment of each round needs to be evaluated separately. A business may have normalized in 2020 (where PPP appropriately offset pandemic-driven revenue loss) but received PPP again in 2021 as a windfall after the business had already recovered. The treatment should reflect the specific facts of each round rather than treating all PPP receipts identically.
Fourth, EIDL loans (Economic Injury Disaster Loans) operated under different rules from PPP. EIDL loans were not generally forgiven and continue to be repaid by businesses years after the pandemic. The interest expense on the EIDL loan is deductible as a business expense and reduces ongoing taxable income. The expert handling income analysis on a business with EIDL exposure should account for the ongoing debt service as a real reduction in distributable cash flow.
Fifth, the Employee Retention Credit (ERC) operated alongside PPP as another pandemic-era tax benefit. Businesses that claimed ERC may have produced substantially different reported income in the affected years from what the business would have shown without ERC. The expert should identify ERC receipts and evaluate whether they should be included or excluded from the income analysis using the same normalization-versus-windfall framework.
Implications for alimony and child support calculations.
The inclusion or exclusion of PPP funds can have a dramatic and material impact on alimony and child support calculations and awards. A small business owner’s gross income drives the support guidelines in most states, and shifts of ten or fifteen percent in the calculated income translate directly into proportional shifts in the support obligation.
For the recipient spouse, including PPP funds where appropriate produces a higher and more accurate support calculation. For the obligor spouse, excluding PPP funds where they produced a windfall prevents an overstatement of ongoing earning capacity. The expert who takes the analytical work seriously protects both parties from supporting decisions made on the wrong income base.
The recommendation for Divorce Financial Coaches handling these cases is to analyze each year of PPP receipt explicitly, document the analytical reasoning for each, and present both the included and excluded results so the court can see the impact of the analytical choice. Presenting only one result without showing the alternative leaves the analysis vulnerable to cross-examination.
The broader principle — emerging benefits and income analysis.
PPP is the most visible example of a broader pattern: government benefits and tax-favored programs that affect small business income in ways that the standard income analysis framework does not directly address. The COVID-era programs included PPP, EIDL, ERC, the Family First Coronavirus Response Act tax credits, and various state-level programs. Each requires the same analytical question: does this program normalize earnings (include in income) or produce a windfall (exclude from income)?
The same framework applies to programs that may emerge in future economic disruptions. Whatever the next round of small business support looks like, Divorce Financial Coaches will face the same analytical question. The decision tree — identify the program, identify the business’s actual revenue performance during the affected period, identify whether the program normalized or produced windfall, treat the program funds accordingly — generalizes beyond PPP and provides the working approach for whatever comes next.
How VennBoard supports PPP-aware income analysis.
Income analysis on small business owners is among the most analytically demanding work Divorce Financial Coaches perform. The PPP question adds complexity that the standard analytical workflow has to absorb. The supporting documentation — tax returns, profit and loss statements, general ledger detail, PPP loan documentation, forgiveness applications and approval letters, EIDL documentation, ERC claim documentation — proliferates across multiple years and multiple sources.
VennBoard’s matter workspace holds the full document set with structured tagging by year, by program, by document type. The income normalization analysis attaches each adjustment to the underlying source document, producing the cross-referenceable working file that survives cross-examination on the PPP treatment specifically. The built-in calculators model both the include-PPP and exclude-PPP scenarios so the analytical impact is visible at a glance.
Two operational features earn their keep on cases involving substantive PPP analysis. The audio and video transcribe tool produces searchable transcripts of business-owner interviews where the actual revenue dynamics during the pandemic period are discussed, which is the qualitative evidence that supports the normalization-versus-windfall determination. The immutable messaging log between the practitioners on the case captures the analytical reasoning behind the chosen treatment, which becomes the defensive record if the income figure is later challenged on appeal or in modification proceedings.
PPP-era income analysis will continue to be relevant for years as cases involving 2020-2022 income data continue to work through the system. VennBoard exists to support the analytical rigor these cases require. Professional walkthrough at VennBoard.com, product detail at VennBoard.com.