The CARES Act and Divorce

maintenance after tax cuts and jobs act

Given the current unstable economic climate, spouses going through a divorce currently will have different concerns – needing ready cash to pay bills, having trouble finding employment, possibly having to close a family business. All of these property and income-related issues actually were impacted in some way by the CARES Act – the relief bill (or bills) passed by Congress and signed into law by the President. Let’s look at how some key provisions impact divorce.

The first program to examine is the Paycheck Protection Program, or PPP. The idea of the PPP was to advance small businesses (principally) significant funds equal to their payroll and rent demands for a period of eight weeks. The law has since been modified to extend forgiveness (and loan requests) for a period of 24 weeks. The most obvious way the PPP impacts divorce will be if one or both spouses own a small business. When the pandemic hit, many small businesses struggled to pay basic expenses because of the lockdown for non-essential businesses. If a spouse owning a small business took out a PPP loan, that loan enabled the business to continue, including paying the spouse income for several months. However, much of the loan should qualify for forgiveness if the spouse used correct numbers in applying for the loan. It is important to note that if a loan is totally forgiven, the loan does not count as income for the business. In an ongoing divorce, the failure to take advantage of PPP and instead going into potential bankruptcy could be used against a spouse in a divorce. Also, if the spouse not owning the business seeks a valuation, and the other spouse failed to take out a PPP loan, the court could consider that behavior an attempt to voluntarily unemploy to reduce income for the purpose of maintenance and child support. Under Missouri law, courts can impute income to spouses who voluntarily unemploy. In another scenario, if two spouses collectively run a business, their saving the business will boost overall family assets, so the failure to have utilized PPP for that purpose will be a missed opportunity. On the other hand, if the business they ran had been doing poorly, the pandemic may have been the last straw sending them to bankruptcy, thereby complicating their divorce.

The CARES Act significantly impacted retirement plans. First, for those over the age of 72 who are receiving distributions from their retirement, that sum that normally must be distributed is waived for this year, so no penalties will be assessed for not taking out the minimum distribution – a big issue for “gray divorce” cases. For younger spouses, if they find themselves in tough financial positions, they may want to take out some of their retirement savings to pay for essentials. Usually, doing so will result in a 10% penalty; however, the CARES Act waives that penalty this year, freeing up a significant sum for early withdrawal. Further, retirement withdrawals are typically taxed as income; under CARES, a spouse could defer those taxes for up to three years. How do these rules play out in a divorce now pending? First, no spouse can make the withdrawal without the approval of the other party under Missouri local rules of court. Should a spouse do so, that spouse could wind up owing half of that sum in settlement to the other spouse. Second, spouses must take account of the tax delay in any settlement because those taxes will still need to be paid and should be part of any property distribution.

A final change of note is that businesses can carry recent losses (from 2018, 2019, or 2020) back for up to five years. Typically, losses carry forward. The benefit here is that if a business is struggling this year because of the pandemic, it can carry that loss back to years that were profitable and thereby produce a tax windfall that could result in a substantial refund. Spouses should be aware of this change, as if they finalize the divorce this year without accounting for this change, one spouse could receive a hefty refund when it should be divided between the spouses as marital property. Conversely, a spouse that could receive that refund through a business might want to use it as leverage to balance off other assets in an overall property settlement.

As you can see, the CARES Act did a great deal to help struggling families, and those benefits could impact your divorce. You should consult with your attorney and accountant to be sure none of the CARES Act benefits go unaddressed in your divorce.

If you have questions about the CARES Act and divorce, contact us – we can help.