The COVID-19 pandemic resulted in unprecedented economic turmoil, with many businesses forced to shut down or scale back operations To provide relief, the federal government launched the Paycheck Protection Program (PPP) to offer forgivable loans to small businesses However, PPP loans have created confusion regarding how they impact child support obligations for business owners. This article examines whether child support can garnish PPP funds and how PPP loans affect income calculations for child support.
Key Points
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PPP loans are not exempt from garnishment for child support or other creditors
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Receiving a PPP loan does not reduce child support obligations.
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PPP funds used for payroll and other business expenses can lower taxable income, indirectly reducing child support payments.
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Courts may treat forgiven PPP loans as income when calculating child support.
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Proper documentation of PPP spending is crucial to avoid overstating losses and underpaying support.
Can Child Support Garnish PPP Funds?
The short answer is yes. The CARES Act, which authorized PPP loans, does not prevent garnishment of PPP funds for child support arrears or other debts.
PPP loans are treated like regular business income. They can be garnished by state child support enforcement agencies to collect on overdue child support, referred to as child support arrears.
If you are behind on child support payments and receive a PPP loan, notify your child support case worker. Do not assume the PPP loan is protected from garnishment. Being transparent can avoid enforcement actions.
Some states like California initially protected PPP loans from garnishment but later reversed course. Relying on exemptions that are not in federal law is risky.
The bottom line is PPP loans themselves do not reduce existing child support obligations. The funds can be garnished like other income if you are in arrears.
How Do PPP Loans Affect Child Support Calculations?
However, just because PPP loans can be garnished does not mean they should be counted as income for calculating child support. The treatment of PPP loans in child support calculations is more nuanced.
In general, child support obligations are based on the income of the parents. For business owners, calculating income means accounting for both gross business receipts and ordinary and necessary business expenses.
This creates complications for PPP loans:
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PPP loan proceeds are not counted as income on tax returns.
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Business expenses paid with PPP funds can still be deducted.
So PPP loans are “forgiven” in that:
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Recipients do not pay income tax on the loan proceeds.
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They can deduct expenses paid with the loan as business losses.
A forgiven PPP loan therefore artificially reduces taxable income while providing an economic benefit. Courts may treat forgiven PPP loans as income when determining child support obligations.
How to Avoid PPP Loans Reducing Child Support
If you receive a PPP loan, avoid some common pitfalls that could improperly minimize child support:
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Do not hide receipt of a PPP loan. Disclose that you received a loan and account for it on financial statements. Transparency prevents allegations of hiding income.
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Track PPP expenses separately. Do not commingle PPP funds with other business income. Maintain records showing how you spent the loan proceeds.
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Offset lowered taxable income. If PPP spending reduces your reported business income, provide evidence to the court showing your true economic circumstances.
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Claim only eligible expenses. Under program rules, PPP funds can only be used for certain costs like payroll, rent, utilities, etc. Improper deductions will be disallowed.
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Update support if loan is forgiven. If your PPP loan is forgiven, this should be considered income. Seek to modify support orders to reflect the changed circumstances.
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Consult an attorney. An experienced family law attorney can help document your finances and negotiate treatment of PPP loans to avoid underpaying support.
With proper documentation and transparency, courts can account for PPP loans in a way that does not shortchange child support recipients. But unclear or improper handling of PPP funds risks court sanctions along with owed back support.
The Bigger Picture
On the surface, PPP loans do not exempt someone from meeting their child support obligations. But complex tax issues arise when calculating income for owners of small businesses impacted by COVID-19.
Parents should be prepared to justify business income and expenses reported during the pandemic, especially when benefiting from PPP loans. Support orders may need to be modified to reflect true earnings.
Navigating these uncertain times requires both parents to focus on the children’s best interests. This may mean compromising on support arrangements until business operations and income stabilize.
As with any legal matter involving children, obtaining advice from an attorney experienced in family law and child support can help ensure fair and lawful outcomes. Handled responsibly, PPP loans can provide relief to struggling businesses without shortchanging child support recipients.
Why Will PPP Loans Create So Much Chaos in Alimony and Child Support Cases in 2021 and 2022?
There are three main reasons that PPP loans will create chaos in Alimony and Child Support Cases in 2021 and 2022:
1.) PPP Loans will be difficult to detect on tax returns. Because PPP payments are “forgivable loans”, business owners will not need to report the loan proceeds as gross income on their business or personal tax returns. Although a careful reader may be able to discern that a business received a PPP loan somewhere in a state or federal tax return, it may not be easy to spot. As of the date of this blog, there appears to be no requirement in the federal tax code (nor the Massachusetts code at the state level) requiring business owners to disclose their receipt of a forgivable PPP loan.
Suggestion: In any case involving self-employment income for at least the next three years, family law attorneys must use discovery to aggressively seek to determine whether the opposing party receipt a PPP loan in 2020 or 2021.
2.) In practice, PPP Loans proceeds are like (hidden) business sales, only better. Although the proceeds of a PPP loan are not reported as “gross receipts” on the business’s tax return, the economic reality for business owners is that a PPP loan, once forgiven, is completely indistinguishable from sales receipts. Only, unlike ordinary gross receipts, the PPP loan proceeds are not taxable. In the
Suggestion: Family law attorneys should argue that the entire balance of a forgiven PPP loan must be attributed to the self-employed party as gross income for support purposes in the year the loan was received. Indeed, if the PPP loan was very substantial, attorneys should consider seeking an additional attribution due to the non-taxable nature of the forgiven loan.
3.) Business expenses paid by the business using PPP loan were not legitimately paid by the business. It is crucially important for attorneys and judges to understand that just because the tax law allows business owners to deduct business expenses paid using PPP loan proceeds, these “expenses” were paid by the US treasury, not the business itself. Allowing a business to report a non-existent loss may be allowed under the tax code, but courts should not allow such expenditures to be used to reduce income for child support or alimony. (In many ways, this is the most insidious challenge posed by PPP loans, since the deductibility issue will allow businesses that had an excellent financial year to appear as if they suffered a massive loss in tax years 2020 and 2021.)
Suggestion: If a judge agrees that the PPP loan proceeds should be treated as income to the business owner for support purposes, it not necessary for the judge to set aside the business expenses paid for with the loan proceeds. However, if the PPP loan has not been forgiven, or the judge expresses uncertainty about whether the PPP loan should be countable as income for the owner, it is imperative that the attorney argue that all business expenses paid for with loan proceeds be treated as non-deductible for support purposes.
In short, the easiest way for judges and attorneys to address PPP loans in the years ahead is to simply treat the forgivable loan proceeds as additional income to the business owner. If the loan proceeds are countable as income to the owner, then there is generally little need to address the business expenses that were paid for using loan proceeds and deducted on the business owner’s tax returns. However, until there is wide acceptance among judges and bar associations on the issue of PPP loans in the support context, attorneys should be prepared to argue why (a.) the loan proceeds should be treated as income for support purposes and (b.) allowing the deduction of expenses paid for with loan proceeds is unconscionable if the loan proceeds are not treated as income to the owner.
Government relief program distorts profits and losses for small business for 2020 and 2021, generating chaos in child support and alimony cases.
Calculating self-employment income for child support and alimony cases is a challenge in the best of times. The Covid-19 pandemic has only deepened this complexity, forcing parents and spouses to calculate self-employment income for support orders during a sharp economic downturn. For cases in which a party’s business received a PPP loan in 2020 or 2021, the difficulty of calculating child support and alimony for self-employed parents is about to get even harder. To put it succinctly, business owners who receive PPP loans are not required to declare the loans proceeds as income, but the very same owners can write off all expenses paid with the PPP funds as deductible expenses. The result: phantom paper “losses” for small businesses that benefited greatly from forgivable PPP loans in 2020 and/or 2021.
In December 2020, Congress passed its second major Coronavirus relief bill, which included a new cash infusion for forgivable small business loans through the Paycheck Protection Program. Buried within the text of the bill was a controversial provision allowing business owners who received a forgivable PPP loan during 2020 to deduct all of the loan proceeds the company spent as business expenses – without treating the forgivable loan as a source of income for the business. In other words, a company that received a forgivable PPP loan for $500,000 in 2020 can essentially write off the entire $500,000 as a loss on the company/owner’s 2020 tax returns – without reporting the $500,000 in funds it received as income.
Ask Carolyn Woodruff: PPP and Child Support
FAQ
What happens if you can’t pay back your PPP loan?
If you do not receive full forgiveness of your PPP loan and fail to make payments, your lender or servicer is required to notify the SBA once you become 60 days delinquent.
Does child support affect loans?
Lenders consider child support payments as a recurring monthly debt, similar to car loans or credit card payments.Mar 27, 2025
Does a PPP loan count as income?
No. Loan proceeds received under the Paycheck Protection Program (PPP) are not taxable income, regardless if the loan was forgiven or not.
Can child support be taken from school loans?
And though student loans aren’t usually considered in child support calculations, attorneys can argue that student loan payments make the designated child support payments unaffordable, and could successfully reduce the payment amount.