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Financial Literacy: The Paycheck Protection Program: Opportunities for Fraud in Divorce Cases

Our CFL™ course teaches you about the many ways divorcing spouses hide money. The recent federal Paycheck Protection Program (PPP) is an example of an opportunity for some shady business owners to shield or falsely report funds. Intended to keep businesses open during the coronavirus lockdown, some may choose to help themselves instead. 

The PDQ on PPP

The PPP offered small businesses with 500 or fewer employees forgivable loans to continue to pay employees and cover other qualified business expenses. Up to $10 million was available for each eligible entity until August 8th. The loan amounts varied based on the number of employees and average payroll costs businesses needed to pay to stay open. 

After the original CARES Act was passed in March, the PPP Flexibility Act of 2020 enacted in June let businesses in operation on February 15 that took a PPP loan delay their payroll tax payments. The Flexibility Act relaxed the guidelines for the forgivable and non-taxable part of the loan, requiring at least 60 percent of the funds to be spent on up to 24 weeks of payroll costs (down from 75 percent). Forty percent of the funds could go toward non-payroll expenses such as rent, mortgage interest, and utilities.

If businesses use the funds for other expenses that aren’t forgivable, the PPP is a five-year loan at one percent interest (up from two years for loans issued before June 5th). For borrowers who seek loan forgiveness, the deferral period lasts until 10 months after the end of the covered period.

For sole proprietors, the U.S. Treasury Department and the SBA offered a similar program, Owner Compensation Replacement (OCR). It allowed independent contractors with or without employees who filed a Form 1040 Schedule C and/or Schedule F to cover payroll and make up for lost income. The loan was based on 2.5 times the business’s 2019 net profit, with a maximum allowed amount of $20,833.

Generally, loans aren’t considered income, they’re money used to help businesses operate. Depending on any updates that clarify otherwise, the OCR money may qualify as income and need to be reported on 2020 tax returns. The CARES Act declares that taxwise, once the PPP loan is forgiven, deductible expenses are no longer deductible, and income tied to the loan forgiveness is excluded from gross income.

Room for Fraud

If a business uses the PPP loan funds properly, they can boost its value. Depending on state laws, when a party files for divorce, any debts may or may not be considered marital assets and can be included in a business valuation. These loans are essential in keeping a business open and both parties in a divorce have an interest in keeping this asset available for division. 

It remains to be seen how the misuse of these funds can affect divorce cases. Forensic analysts might look at how to handle the PPP loans in their business valuations, such as how the loan was funded and management’s forecast of the forgiveness amount to see how it can affect business cash flow.

Because business owners don’t have to deduct the forgivable loan expenses, there is a chance for them to hide money, which can affect business valuations and support calculations. 

In verifying the PPP loan amounts, for businesses with employee and payroll records, you would, of course, get 2019 payroll reporting forms and 2019 and year-to-date 2/15/2020 payroll reports. For sole proprietorships without employee and payroll reports, you would get 1099 forms, bank statements, K-1s to identify distributions, and IRS form Schedule C (of F, if applicable). It’s better to use profit and loss statements from an accountant, bookkeeper, or employee rather than the borrower, and to use tax returns and bank records to support the loan amount. 

The PPP loan guidelines may continue to change. With careful attention-to-detail, you can determine if the numbers truly add up for a fair outcome.

Nowadays, clients look for attorneys with the right financial skills and knowledge to effectively handle divorce cases. Are you confident that you have all the tools you need? Join the family law practitioners who have achieved their CFL™ designation and now distinguish themselves from their competitors as trusted advisors. Find out more in our free information packet today.