Video Transcript: Divorce and the CARES Act: What You Should Know
Diana Shepherd: My name is Diana Shepherd and I’m the editorial director of Divorce Magazine and Family Lawyer Magazine. My guest today is Manhattan tax and financial expert John Johansen, and he is here to discuss what divorcing individuals should know about the CARES Act. Part of the tax, accounting, and financial planning industry for over 25 years, John is a Certified Public Accountant, a Certified Financial Planner, and he also holds the AICPA’s Accredited in Business Valuation designation. John has developed a niche specialization working with divorcing individuals and matrimonial attorneys in the areas of business valuation and forensic accounting. Welcome, John – and thank you for being here today!
John Johansen: Thank you for having me, Diana. It’s my pleasure.
Let’s dive right in. What are the key points of the stimulus bill known as the Coronavirus Aid, Relief, and Economic Security Act, otherwise known as CARES, that a divorcing couple should be aware of?
If the divorcing couple of one of the parties owns a business, they should be aware of the two primary loan programs that were created as part of CARES. The first of those loan programs is referred to as the Payroll Protection Plan, also known as PPP. Just as the name implies, the government’s goal with that program was to help employers keep their employees either on the payroll or to bring them back if they were laid off or furloughed. This program is a forgivable loan program as long as 75% of the funds are used for payroll costs including not only wages but health benefits and retirement benefits. The other 25% can be used for rent, utilities, and mortgage interest. So that should be something that Divorce Attorneys and their clients should be aware of. The other loan program is called the EIDL program, also referred to as Economic Injury Disaster Loans. Those are true loans. They’re low-interest loans at 3.75% and they have a 30-year payback period. They can be used for any type of business expenses – they’re not only limited to payroll. Those are the two loan programs. In addition to the loan programs, there are many tax changes that affect not only businesses but individuals as well. The one that affects individuals will likely also affect Divorce Attorneys that may be scrambling or trying to settle cases where spouses are experiencing economic difficulty. There were three changes made to retirement plans for individuals.
The first change is that there will be no required minimum distributions from retirement plans. This primarily affects taxpayers that are over the age of 72, so those experiencing Grey Divorce would be affected by this. They should be aware that those people will not have to make their required minimum distribution this year. In addition to that, for younger divorcing individuals, those under 59 and a half, there would normally be a 10% penalty – the early withdrawal penalty – on monies taken out of a retirement plan. This year, they will be able to take that money out of a retirement plan up to $100,000 and not pay the 10% penalty. So with $100,000, that’s a savings of $10,000. In addition to that, normally that money would be taxable in 2020. Under this program, you can defer those taxes for up to three years – it’s a third each year for the next three years. You also get the option to replace the funds, and if you replace the funds within that three year period, then it will become non-taxable. That would allow divorcing couples to find the cash to settle their divorce cases in 2020.
The other tax changes that affect businesses are the changes to the net operating loss rules, where a business that has a net operating loss on its books that was generated in 2018, 2019, or 2020 can carry that loss back up to five years. That’s a big change because up to now, they were only able to carry that forward, they were not able to carry that back. So what they could do is if they have a profitable year in 2017, they can take the loss from 2018 and carry it back to 2017 or the loss from 2019 and carry it back. Up to five years, they can go back. That would produce a refund, because they’re reducing their taxable income for those years, and thereby reducing their taxes that they’ve already paid.
Another change is the reduction of the cap on business losses that an individual can take on their tax return. A married couple only used to be able to take up to $500,000. Now there is no limit. Other individuals were only able to take $250,000, and now that that limit has been removed for 2018, 2019, and 2020. Again, you would need to go back and amend those returns to produce those changes. There’s also a change to the limit on business interest. Normally that’s capped at 30% taxable income, and that has been increased to 50% of taxable income.
There’s also another big one. We have been hearing a lot in the news about restaurants and how they’re going to suffer. I heard a statistic that only one in five restaurants will reopen and survive. So there was a change to the leasehold improvement rules. Leasehold improvements are improvements that people who rent properties make to that property. Restaurants are usually in that category. Prior to the CARES changes, those improvements had to be depreciated over 39 years, so you got a very small tax of depreciation expense for taxes. They have currently changed that to 15 years, so any property that has under a 20-year life is eligible for bonus depreciation, which means you have the option to either depreciate that over the 15-year period, or you can take 100% in the first year – this would affect tax years 2018, 2019, and 2020. That change is a permanent change, and it is a Technical Correction Act, so it will affect future years as well. But you can see if a restaurant spent $500,000 to improve that property, they can go back and take that $500,000 expense all in one year, so it could produce a tremendous amount of a refund.
How has COVID-19 affected business valuations for people who are currently going through divorce? I can see that on one side, the non-business owner would definitely want the valuation to have happened before COVID-19, and the business owner would definitely want it to happen after, to take into account the last few months. What the valuation sits at, of course, will affect not just property division, but spousal support and child support, so both sides are going to be equally invested in having a different business valuation, I presume, what are you doing? What’s happening?
That’s a good question, Diana. In business valuation, we have a rule that facts known or knowable on the date of valuation are the only facts that you’re supposed to take into account in doing that valuation. So in your example, if we had a valuation date of January 31, we’re still working on that valuation. And now we know what’s happened to this business after January 31. We’re not really supposed to take those facts into account. So I think what it’s going to boil down to is the attorneys are going to need to get together and maybe negotiate a little bit. There will definitely be some court cases going forward that will address this issue. It’s going to be an interesting time. We’ve never had a situation like this before, where it’s affected such a broad band of businesses. So, to answer your question, I think we need to see how that develops. From my perspective, as a valuation analyst, I’m not allowed to take any information into account if I wasn’t able to know it on the date evaluation
Diana Shepherd: My guest today has been Manhattan tax and financial expert John Johansen, who has a niche specialization in working with divorcing individuals and matrimonial attorneys in the areas of forensic accounting, business valuation, and taxes. John, thank you so much for taking the time to be with us and answer these questions today!