A family lawyer asked if a loan received under the Paycheck Protection Program (PPP) will be considered income for purposes of the child support obligations of the business owner.
The simple answer:
Loans are not income. The business is not receiving money as a result of selling any products or services. It’s simply a pile of cash from which the business can operate, and under normal circumstances, the business has to pay back the money.
The complicated answer:
A business owner often has two sources of income that are factored into child support calculations: a paycheck and the net profits of the business. Let’s start with the paycheck. The purpose of the PPP money is to continue paying employees. That includes the business owner. For many business owners, there will likely be no change here. He or she got a paycheck before, took out the loan, and continues to get the same paycheck.
For some, however, this may get tricky. Suppose the business owner takes the loan under the guise of paying payroll, but then doesn’t pay herself. You have to figure out whether she did not take a paycheck for the health of the business or whether she did it to manipulate the child support calculations.
The loan application will help here, since the business owner has to report how many employees are included in the loan amount requested, show the payroll calculations, and provide supporting documentation. If the business owner’s salary was included in the calculations to obtain the loan, I’d suggest that the owner should have taken a paycheck.
Let’s move to the net profits of the business. Due to the COVID-19 pandemic, revenues of businesses are likely to be down, which means profits will be down too. A PPP loan may replace some of that income if the loan is forgiven. Suppose the company takes out a loan of $100,000, uses it all for payroll and allowable business expenses and has $80,000 forgiven. The $80,000 becomes income to the business because it’s now “free money.”
There’s an additional wrinkle, though. The law authorizing the PPP loans says the $80,000 of loan forgiveness will not be considered income for the purposes of paying income taxes. So you probably won’t see the $80,000 on an income tax return. But I’d say that for the child support calculations of the business owner, you should be sure the money is included in the calculation of the net profits. It’s still income to the business, even if it is not taxed.
Don’t expect that business owners are going to make money because of the PPP loans. The whole idea is that the money is used to pay employees when revenues have been negatively impacted. Even if there is loan forgiveness, most companies won’t see an increase in net profits because of it. However, it is an important issue that should be examined carefully when you’re doing the child support calculations.