How Income is Calculated When You are a Business Owner
When a person gets a job working for a company, they have a good idea of their hourly wage or salary. However, when they own a business, things are different. Their income is not constant. They may have good months and bad months, and when they deduct all their business expenses, it can be hard to determine just how much money they are making.
How Does it Affect your Divorce?
This complicates matters when a business owner is getting a divorce. Not only are they splitting their business assets, but they may have to pay child support and alimony as well. Both of these monthly payments are determined by gross income. Gross income refers to virtually any type of money coming in, whether it be business income, money from a second job, unemployment benefits, Social Security benefits, interest from a bank account, or profits from selling property.
But for a business owner, calculating gross income is not so cut and dry. A small business owner’s income is often detailed on Schedule C of their tax return. However, this number is not the whole story. Schedule C reports gross sales, adjusted gross income, and various deductions. Business owners often deduct various expenses, such as vehicle costs, depreciation, meals, entertainment, insurance costs, professional services, and other expenses related to running their business. Schedule C determines the profit of the business after deducting expenses from adjusted gross income. This is reported as the business owner’s income on their 1040.
But the problem is that this number can be misleading. Fraud is common among business owners. In many cases, personal expenses are run through the business. The business owner may try to hide this by using a business credit card for a family vacation or other personal expenses.
Also, while the IRS allows certain expenses to be deducted from a business’s earnings, courts are not required to accept the “taxable income” as the “gross income” when it comes to calculating child support. This means that vehicle deductions, home office deductions, and depreciation are often added back into the profit. This allows them to be used as gross income when it comes to determining child support payments.
In any case, a lawyer may conduct a detailed examination of all business income and expenses to look for any signs of fraud. Entertainment expenses and depreciation of assets are two areas that will especially be looked at closely.
Contact Us Today
Small business owners do not get W-2s or 1099s, so it is a little harder to determine their income. If you are getting a divorce, you should understand how your income will be calculated for child support and alimony.
The Kentucky child support lawyers at Velez Law, PLLC, can help you understand your legal rights and obligations when it comes to ensuring your child’s financial needs are met after a divorce. Fill out the online form or click below link to schedule a consultation.