How the Paycheck Protection Program Can Impact Child Support and Spousal Support

The Paycheck Protection Program was passed to help small businesses impacted by the Coronavirus (COVID-19) pandemic. The program was designed to keep small businesses from laying off workers during shutdowns imposed by State governments to help slow the spread of the Coronavirus.

These PPP Loans become “grants” (the business does not have to pay the loan back) when a business uses the money in a certain way. If a small business used that money to pay their employees, rent and utilities, then it is very likely the PPP Loan will be forgiven.

What does that mean for a business?

This means the loan is no longer on a business balance statement as a debt. It also means that the wages, rent, and utilities that were paid with that loan are no longer deductible as business expenses. Essentially, once the loan is forgiven, the business will have more income that could be taxable.

For businesses that were able to continue to do business and have high employee expenses despite the shutdowns may have additional income to report for tax purposes (and potentially distribute to its owners) in an amount equal to the PPP Loan.

But what about small businesses that were shut down, had to lay off workers, and could not conduct business during a shut down?

After the recent amendment to the PPP Loan forgiveness requirements, businesses which did not rehire employees until they were permitted to resume business, will also reap the benefits of PPP loan forgiveness. Again, if a business substantially resumed or even exceeded prior year revenue due to pent up demand (an example would be personal care services, such as hair salons), then that business will likely see additional income to report because they are receiving income for services, but the cost of the labor for that income is being forgiven as part of the PPP Loan.

On the other hand, 2020 may also be the year when a reduction in support is appropriate because your business was so severely impacted by the Coronavirus shutdowns. An example may be a business with high non-labor operating expenses, such as equipment lease costs. The PPP Loan forgiveness standards are very specific and apply only to certain business expenses.

What does this mean for child support or spousal support in a divorce?

If your spouse owns a business, or you own a business, there must be a careful and thorough review of financial statements for the 2020 year to evaluate the impact of the PPP Loan forgiveness on an owner’s income that is available for support. The review requires careful analysis because most business owners will find ways to reduce taxable business income, which includes purchasing equipment. A tax return (whether personal or corporate) is only one part of the puzzle in determining income for business owners.

At Homier Law, Barbra carefully reviews financial records of businesses, and depending upon the circumstances, works closing with CPAs and other financial professionals to develop a case strategy that optimizes the outcome of your support case – whether that is to lower your support obligation or increase the support you are presently receiving.