What will be the impact of the pandemic on the affairs of a couple going through a divorce? | High Swartz LLP
Warning: the CARES law can distort the cash flow of companies from 2020.
Almost every business has had an unusual year in 2020. When the pandemic hit, work slowed down dramatically, and then came the boost. In particular, the sweeping Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided short-term help to many businesses.
As the hospitality and entertainment industries collapsed, some businesses soared. (Did you need boxes?) As business books and records are studied in divorce and child support litigation, the impact of the CARES Act on the business will skew regular balance sheet entries. There will be changes in the treatment of expenses and losses related to business income.
These changes may be unknown and, in some cases, misleading. Why?
- When the Payroll Protection Program (P3) loans were granted, business expenses (salaries, taxes, rent, and eligible expenses) were paid from these federal funds.. Today many, and perhaps most, PPP loans are canceled. Canceled loans that have paid for certain expenses will result in deductions for those expenses. Loans over two million dollars ($ 2,000,000) are regularly audited by the federal government. One-off audits are possible. Investigations by divorce courts and litigants should include a review of all loan applications and loan forgiveness documents. In the event that a business has received loans related to COVID-19, the company’s cash flow for 2020 may be artificially high.
- Employers can delay paying payroll taxes and payroll taxes for 2020. Fifty percent is due in December 2021 and fifty percent is due in December 2022. The deferred payment will be made without interest charges. In the meantime, the entry in liabilities will remain in the books.
- The 2020 legislation removed restrictions on loss carryforwards. A business owner can now amend their tax returns for 2018 and 2019 to allow for a five-year loss carryback. Losses in 2020 also benefit from rolling back five years.
In cases where a business is owned by a person in the process of divorce or litigation for the payment of child support or child support from a dependent spouse, changes in a company’s cash flow may seem unusual. The law can create a change in the way a business’s income (income and expenses) is recorded and carrying back losses could cause confusion and possibly financial suspicion or mistrust. While a federal government or bank audit of a P3 loan may reveal mistreatment, the business owner may decide that it is possible to bend the rules because the chances of an audit are low.
Yet in the context of a divorce and alimony dispute, the forensic accountant and lawyer for the unemployed spouse will closely scrutinize the books and records.
Here are some of the topics based on the three changes to the law:
- The business owner who received a PPP loan, later canceled, may argue that 2020 income and cash flow cannot be replicated in 2021 or beyond. 2020 cannot be considered a typical year for the purposes of income available for support in 2021 or for assessing the company based on past performance.
- The non-owner spouse who is in desperate need of spousal and child support may request that deferred payroll taxes, although a liability on the books, allow current cash flows to fund the payment of an annuity reasonable food.
- If 2020 is a year after separation for a divorcing couple, the business owner will need the cooperation of the separated spouse to file amended tax returns in order to obtain tax refunds for the years preceding. the separation. While the amended returns will trigger tax refunds, if the loss occurred after separation, in this case in 2020, should the carry-back loss during the marriage years trigger a refund that belongs to? marital inheritance? It could be argued that the 2020 loss creates a post-separation, not marital, repayment. On the other hand, the non-owner spouse will seek to share the benefit of the refunds that depend on that person’s cooperation with the filing of the amended returns.
Calculations of the net income available for support of lawyers specializing in family law and forensic accountants (NIAS) will be difficult to project in the future based on the 2020 data. Will the NIAS for 2021 reflect 2020 ? Can 2019 be considered more typical after the upheaval of 2020? Will the company quickly return to the circumstances of 2019?
In divorce cases where a business is valued, it is usually based in part on the economic performance of the past three to five years. The valuation of the business will take into account revenues normalized to typical revenues and expenses. Arguably very few businesses were operating by past standards in 2020, so can 2020 books be considered typical? What adjustments are justified?
Some business owners will say that the great year, say, cardboard manufacturing, 2020 will never be repeated. Other business owners who suffered in 2020 will ask that revising previous stable years is inappropriate and therefore that the business value should be modest for their struggling businesses. Will the cash-strapped business owner litigation be affordable for the divorcing couple given the in-depth analysis required? Data collection from 2020 will be important and the views of the lawyer and forensic advisers will be essential.