Child support laws mandate that anyone paying child support provide proof of income. While employees often enjoy consistent paycheques from month to month and year to year, business owners’ revenue can fluctuate considerably between periods.
Many savvy entrepreneurs use legitimate deductions such as depreciation to reduce their reported income on financial statements; this makes determining their actual income more challenging for child support purposes.
Determining Your Income
Calculating child support as an entrepreneur often necessitates professional assistance from a family law attorney and a financial professional. The complex interplay of income, expenses, and legal considerations may provide enough wiggle room that they could be exploited against you. Child support calculations typically rely on recent tax returns and net income. However, self-employed income fluctuates significantly from year to year or month to month, making this method unreliable; hence, the importance of providing as much information about current earnings.
Courts often order parents to contribute a percentage of their gross income towards child support payments and take into account any deductions and expenses applicable – for instance; rental income may count towards this figure as an income source; additionally, some courts consider salary and bonus payments from businesses, non-cash items like free housing or company cars as income sources as well.
Courts may also factor in expenses that provide personal benefits to one parent, such as travel costs, meals, and entertainment expenses. While such fees are sometimes necessary and reasonable for running a business, they shouldn’t reduce net income and should, therefore, be included as earned income when calculating child support payments.
Some states permit depreciation to count as a reduction in net income when computing child support payments. Depreciation does not directly impact cash flow but is generally seen as a capital expenditure intended to improve long-term value; child support calculations should, therefore, account for it accordingly.
Not uncommonly, one spouse will accuse a business-owning parent of hiding income or understating earnings to avoid more child support payments. Such accusations may prompt an investigation or, at minimum, put them into an awkward position with the judge and force them to defend their income claims.
Taxes
Business owners sometimes use tax deductions to lower their reported income for child support calculations, which can present problems. A judge must evaluate if claimed expenses are ordinary and necessary in running their respective businesses, while some courts also consider any in-kind or personal benefits received as a result of certain expenditures – any such benefits should generally be added back into a parent’s gross income for support calculation purposes.
Another challenge faced by entrepreneurs is experiencing significant fluctuations in revenue. When appearing before the court, statements will usually be required that demonstrate how much money has come in and been spent, as well as any evidence that indicates the overall stability of numbers. Therefore, it would be wise to consult a certified public accountant before beginning this process to address any possible problems before they surface in court.
An accusatory spouse often accuses business owners of falsifying their income to provoke an investigation or, at the very least, cast them in an unfavorable light, making the situation even more complex and increasing child support payments. Therefore, business owners must keep all financial data organized; keeping ledgers or profit and loss statements updated, bank account statements, stock options documents, and financial affidavits up-to-date can help streamline this process and simplify child support payments on Long Island entrepreneurs.
In-Kind Expenses
Child Support calculators typically employ an automatic algorithm that adds numbers into a worksheet and outputs a predetermined payment amount, while business owners need to factor in additional variables when managing income and expenses – this often leads to differences between what their actual gross income may be versus what is reported on tax returns or financial statements.
Tim’s Legal Tip: Courts must carefully consider any claimed business expenses submitted as evidence by parents to establish what gross income will be available to support payments. A judge will assess if claimed expenses are necessary for producing income regardless of tax deductibility or are otherwise ordinary and necessary costs of producing said income.
Depreciation may come under scrutiny in child support disputes; depreciation refers to the noncash deduction against assets expected to decline over time and reduce reported income on financial statements. However, courts are usually uninterested if a parent uses depreciation to reduce apparent earnings for child support purposes.
Retained Earnings
If your business is profitable and producing cash, keeping records of what your company makes is critical for managing finances effectively and providing documentation necessary to establish income for child support purposes. Courts use your income data as part of the calculation of child support payments; should there be any doubt about what has been reported, additional documentation or adjustments could be requested from you, or increased child support payments may be assessed accordingly. Such documentation includes bank statements, profit/loss reports, business ledgers, and stock options documents.
Statements of Retained Earnings (SOREs) are accounting documents that outline your company’s accumulated profits since inception and illustrate your reinvestment orientation and whether dividends are being taken out, as they can affect how much can be invested into new growth projects and paid-back debts. They’re essential tools in monitoring company health, so make sure your statement of Retained Earnings shows just what’s happening inside.
Retained earnings can be found on a company’s balance sheet under the shareholders’ equity section. Retained earnings are cumulative, calculated at the end of every period by adding the beginning retained earnings balance to the ending net income or loss and subtracting any dividend payouts; this information can also be found within your general ledger system.
Business depreciation can significantly lower a company’s net income reported on financial statements. Depreciation, an expense that reduces asset values over time and is usually recorded as a non-cash deduction, has a dramatic impact on profitability but generally doesn’t factor into gross income calculations for child support calculations.
Many entrepreneurs try to hide or minimize their net business income to reduce child support payments, using techniques such as hiding income in offshore accounts or inflating expenses. It is, therefore, crucial that you work with an attorney who has experience handling such cases and can assist in providing accurate documentation that will stand up in court.