I am in a business hit hard by COVID-19. I have asked that the court reconsider my child support. I have not been able to pay myself my usual salary of $200,000, but I did get some PPP-1 money. How do you think the court will look at that PPP grant? I got forgiveness.
There is currently no precedent in the courts for your question. Here is what we do know from the PPP-1 rules and business world. To get PPP forgiveness, a business owner could not just pocket the money. Loans from banking entities have not been treated as income for child support historically and are not a listed item of income for the North Carolina Child Support Guidelines.
Since you got forgiveness, you must have used the money appropriately, which means you were limited to a maximum $100,000 per annum salary during the forgiveness period. The money had to go to employee retention and certain other specified expenses such as rent. You as the business owner could receive a maximum salary of only $8,333.33 per month for the PPP-1 forgiveness period out of PPP-1 money. The recent congressional legislation stated that the grant PPP-1 money is not taxable income, but the expenses paid are tax-deductible.
However, the Child Support Guidelines say that that income as defined on a tax return is not binding on the trial court for child support proceedings. So how should the court look at this? Initially, your business’s balance sheet entry would be a debit to cash and a credit to loans payable, as the PPP-1 money has a promissory note as the legal document. Only $8,333.33 per month maximum can be forgiven out of PPP-1 for the owner’s salary per month since you have made over $100,000 per year prior to COVID. Once the loan is forgiven, it is a contribution to owner’s equity. The owner’s equity account can be called PPP-1 loan forgiveness.
My thought as a CPA is the best way to treat forgiven PPP-1 grant money is as an infusion of capital to the balance sheet, with a debit to loan’s payable to reverse the loan and a credit to an owner’s equity account. (Technically, debit to loan payable and credit an owner’s equity reverses the loan.) The grant should be treated as a contribution to capital by the government to the company. The fact that it is a third-party contribution should not make a difference.
I do not think PPP-1 money is revenue under the Child Support Guidelines. It might be considered for child support up to $8,333.33 as this owner could have paid himself that much and still achieve forgiveness under your fact pattern.
Readers, the scenario here is specific to this fact pattern. Each fact pattern must be calculated individually based upon the historic period selected for comparison as required by the SBA. Your individual maximum number for a monthly salary may be much less than $8,333.33, which is the overall maximum. Your maximum salary number could certainly be lower than $8,333.33 based upon the facts of your unique case.
Talk with your CPA further about this topic, or I will be happy to help further.
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