Divorce and the small business owner

How child support, alimony are calculated, and what that means for the businessperson

Since businesses are property and produce income, companies whose owners are undergoing divorce will be subject to property division, and the income your business generates will be considered to determine child support and alimony obligations.

Child support is money paid to your ex-spouse for support of your children. The amount that any individual will pay in child support is generally determined by a formula called the “child support guideline.” In order to begin the calculation of child support, gross income must be determined, and gross income – defined by statute – includes almost any conceivable form of income.

Calculating gross income is where things start to get complicated for small business owners. A small business owner’s income must be determined on Schedule C of his or her tax return. Schedule C reports gross sales and adjusted gross income. It lists various deductions for business expenses, including vehicle costs, depreciation, meals and entertainment, the cost of insurance and professional services, and other expenses. By deducting expenses from adjusted gross income, Schedule C determines the profit of the business, which is often reported as the business owner’s income on his or her 1040.

So what is the “gross income” for the business owner? Is it gross sales or adjusted gross income or profit? The answer is that none of these numbers is likely to be used to determine child support.

The IRS allows certain expenses to be deducted from the money earned by a business to determine taxable income. The Family Division courts are not required to accept the “taxable income” as the “gross income” for calculating child support.

That means common deductions that might be ignored by the Family Division – including depreciation, vehicle deductions and home office deductions – are often added back into the profit and used as gross income for child support purposes.

Finally, it is not uncommon for a lawyer to conduct a detailed examination of all business income and expenses to determine which expenses are actually business-related and which are personal expenses being run through the business.

A common example is use of the business credit card for personal expenses or a family vacation claimed as a business trip. Ultimately, lawyers know that small business owners have unique flexibility in determining how much of their business profit they will claim as income and they will give greater scrutiny to the small business owner’s financial records.

Determining alimony

Alimony differs from child support in that it is ordered for support of an ex-spouse rather than a child. To determine alimony, the court will balance the need of the spouse seeking alimony against the ability of the other spouse to pay it.

While child support is generally required to be paid until a child turns 18, there is no set period for the payment of alimony, and the length of alimony orders can vary widely.

Since there is no formula for determining alimony, the court is not required to determine “gross income,” as it is in child support calculations. The small business owner should be aware that the court is required to consider the lifestyle to which the parties have become accustomed in determining reasonable need and ability to pay. If the parties have benefited from the business in keeping up their lifestyle, then these business expenses – such as a company car or family vacations – may be included in calculating alimony.

In addition, if one spouse was on the payroll at the business and now will not be, the court will consider an alimony order to provide support until the ex-spouse can find other income. Ultimately, the determination of child support and alimony can be more complicated for a small business owner. Obtaining the assistance of experienced legal counsel will be critical to avoid costly mistakes.

Charles L. Greenhalgh is a partner in the law firm of Cooper Cargill Chant, North Conway and Berlin.

Categories: Legal Advice