Getting a divorce when you have a business is difficult at the best of times. Since 2020, many businesses and individuals have received influxes of pandemic relief assistance, which makes things even more complicated. If you are getting a divorce in Massachusetts and have a business either with your spouse or separately, it’s important to consider how pandemic relief can affect your property division and spousal and child support obligations.
In Massachusetts, PPP loans (Paycheck Protection Program loans) are not treated as income, even if they are forgivable, and the expenses related to them are also deductible. The loans must be reported as a liability on 2020 tax returns. This creates difficulties in valuing any business a divorcing spouse may own and also creates confusion over what is considered to be income for the purposes of calculating child support and spousal support. In addition to PPP loans, there are other forms of pandemic assistance that will affect the valuation of a business and the calculation of obligations in your divorce, including, but not limited to: EIDL loans (Economic Injury Disaster loans); Employee Retention Credit; Federally Backed Mortgage Protection; Stimulus Checks and expanded Federal Unemployment Assistance.
While the state of Massachusetts doesn’t treat PPP loans as income for tax purposes, Family Law courts are coming to grips with these matters through trial and error, so predicting how a judge will view pandemic relief assistance could be difficult. Other forms of assistance, such as expanded federal unemployment assistance, are viewed as income. A thorough valuation of your business in your divorce will need to take any artificial boost in income into consideration and be realistic about how the business will fare after this unusual period is over. For some people, this assessment may only be relevant to 2020 tax returns, but for others pandemic forgiveness assistance will have to be factored in for some time into the future.
Many people will have to factor debt into their future calculations of income and profitability. Business owners may have received forgivable assistance to boost their balance sheet, but in many cases, PPP loans and EIDL loans do have to be repaid and may represent a liability for years to come. This may affect the ability to pay child support and alimony for some time in the future.
In some cases, Pandemic assistance can amount to upwards of a million dollars. If there is suspicion that one spouse is using Pandemic relief assistance as an excuse to be less than transparent about their ability to fairly divide property or pay alimony and child support during a divorce, your divorce attorney can discuss the best strategy with you.
When you’re getting a divorce in Massachusetts and Pandemic assistance is involved, there may be many serious issues at stake. Some, but not all of the following considerations will be relevant to your divorce (your attorney can help you to prioritize):
- You co-own a business with your spouse, and want to get paid fairly for your half if your partner is buying you out. OR you want to weigh the worth of staying involved in the business, but pandemic losses/assistance are making it difficult to calculate future profitability.
- Your spouse received forgivable assistance during the pandemic, but is claiming their obligations should be reduced, while you belief the boost should be factored into your spouse’s income available for child support and alimony, OR, your spouse may be less than understanding about the damage to your business during the pandemic, especially in cases where the business was in a sector that is suffering long-term effects from the pandemic.
- You or your spouse received pandemic assistance, but you have to repay these loans over a number of years which will affect your ability to pay your ex-spouse and support your children.
- You or your spouse were able to delay payroll and self-employment taxes for 2020. Since 2020, business owners have been able to delay paying these taxes and can part pay instead by 2022, without accruing interest. In 2020, loss carryback restrictions were also lifted, so people who are getting a divorce or who have already got a divorce will have to determine what benefits and losses are due to both spouses and whether these are defined as having taken place during the marriage. If, for example, a spouse amends a 2019 tax return to reflect losses after the carryback restrictions have been lifted, OR, if a spouse will owe taxes in 2022 that were due during the marriage, it may be difficult to determine who is responsible for these payments, and who is owed any benefits from them.
- You or your spouse have received any of the many other forms of pandemic assistance which can affect your income and your business’s value through 2020 and beyond. These may include federal unemployment assistance, which was expanded under the CARES Act to cover self-employed people and contractors, deferred mortgage payments and deferred student loans. Additionally, divorcing spouses will have to factor in tax changes that were introduced during the new administration, such as the increased child tax credit. Some tax changes that are currently being discussed in congress may affect your business outlook, such as proposed changes to the estate tax and capital gains taxes.
The most important thing to do if you have received pandemic assistance and are getting a divorce is to get a clear picture of your mutual finances so you can decide on the best strategy to divide your assets in your divorce. Gathering these records may be a difficult process, especially if you have received pandemic assistance from multiple sources, whether the federal government, the state or SBA (Small Business Association) backed financing, as in the case of the PPP loans. Your Massachusetts divorce attorney will work with other financial professionals to assist you to understand this complicated picture post-pandemic, so you can make the best decisions for your business and your family.