Determining income is the first step toward determining the proper level of child support and spousal support. This is easy to do for employees. We just look at line 150 of their personal income tax return. The challenge is determining the proper level of income for those people who are self-employed or are employed by a corporation they solely own.
Self-employed people often write off various expenses for tax purposes that have a personal component to them. For example, the monthly costs of the cell phone might be written off as a business expense but that cell phone may also be used for personal calls. Some self-employed people will write off meal expenses, some of which are with family members or friends. Those meals are really of a personal benefit and not considered a legitimate expense for determining your income for support purposes. As a result, the portion of the expense that is of a personal nature is added back to the self-employed person’s income for determining support. Since taxes are not paid on this income, it must be grossed up to take into account the taxes that are normally paid on it.
For those people who are the sole owners of the shares of a corporation, the issue is whether there is a legitimate reason for the earnings to be retained by the corporation. For example, a corporation that has to make major capital purchases periodically may have good reason to retain its earnings. They will need them to buy new equipment or other capital and will need the money. On the other hand, if a corporation is retaining earnings as a tax savings shelter for its only shareholder and there is no legitimate business reason to retain the earnings, some or all of the retained earnings can be added to the shareholders’ income for the purpose of determining his or her support obligation.
These are often complicated cases. There has to be a careful analysis of the business and the purpose for the earnings being retained. We sometimes use an outside expert such as an accountant or business valuator who has experience looking at these issues.
If we are working through these issues using the Collaborative process, both parties might jointly retain an expert to help determine whether some or all of the retained earnings should be considered income for determining support obligations. This is better than the court process where both parties retain experts who fight it out.
Once we have determined both party’s incomes, we put the numbers into our computer and determine the likely range of support appropriate. It’s easy once we have the income.