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Determining Income from Businesses in Support Determinations

How Income Is Determined for Domestic Support Determinations

One’s responsibility to pay alimony or child support upon divorce depends on the respective financial conditions of the parties.

When calculating a spouse’s child support obligations, Michigan courts will refer to a statutory formula that takes into account the relative income and financial resources of the parties. The formula for calculating child support was developed by Michigan’s Friend of the Court Bureau and reflects the notion that children should receive a proportion of their parents’ incomes as if they still lived together.

Alimony, which is also referred to as spousal support, is support from the higher-income earning spouse to the lower or non-income earning spouse. Courts have ruled that spousal supports awards are appropriate in cases where one spouse has demonstrated a need to receive financial support after divorce and the other spouse has the ability to provide them with such support. The financial ability of a spouse to pay alimony depends on the payor’s sources of income and assets, including owned businesses. Unlike child support, there is no mathematical formula under Michigan law for determining spousal support.

In both Michigan’s child support formula and alimony determinations, the court uses each parent’s “net income.” Similar to determining income for federal income tax purposes, a parent’s net income is derived by adding all sources of income and subtracting applicable deductions and adjustments.

The following items are included in a parent’s net income for determining support:

  • Wages
  • Business or partnership income
  • Self-employment income
  • Rental or other investment income

How to Treat Business Income Streams in Divorce

The challenge in determining income from a family-owned business is that the business owner is the person generally reporting the income and benefits he or she derives from that company. That person obviously doesn’t want to pay any more taxes or support than is necessary. This can impact how much cash a business owner is claiming to have received as well as the types of business expenses that he or she is claiming to offset that income. Furthermore, some expenses that the Internal Revenue Services allows as deductions are not allowed when determining child or spousal support. These can include depreciation, carryover losses and other deductions. Also, certain “perks” of business ownership such as automobile, cell phone and meals and entertainment can be added to a party’s reported income when calculating support. Generally, a business owner’s income will therefore include W-2 wages, distributions and certain personal benefits being derived from the company as a shareholder. Other income could be added back if the other party can prove that the business receives unreported cash. In instances of cash businesses or businesses where income is hard to determined based upon what is being reported, one tactic an experienced divorce lawyer will employ is to determine what the parties are spending more so than what they claim to be making in order to truly understand what the business is bringing in. Another strategy is to secure loan applications the business owner has submitted so see what she has told a potential creditor she is making.

When calculating child support all of these income sources will normally be included. For spousal support, however, some of the income may not be included when that same income has been used to calculate the value of a business for property settlement in the divorce. Businesses such as law firms, medical practices, and other service industries are typically valued using an income approach in divorces. That is, the value to the shareholder is what benefits he or she receives as an owner that would not be earned if he or she was an employee. Essentially, this is the profit of the company which a business appraiser can then multiply times a certain number of years depending on the industry in order to come up with a value.

Some people have argued that counting both the value of a professional business as a marital asset subject to equitable distribution upon divorce and the future income derived from that business is impermissible “double-dipping.” Spousal support in these cases, is it argued, should be based only upon that business owner’s reasonable compensation since the other spouse is being compensated upfront for the future profit stream at the time of the divorce.

Ultimately, business income issues must be addressed on a case-by-case basis. An experienced attorney with the support of financial experts can determine the proper method when professional businesses are involved in a divorce case.

Need Legal Advice About a Sophisticated Family Law Issue?

When significant assets such as investment accounts and professional businesses are at issue in a divorce case, it is in your best interest to consult an experienced attorney from the American Divorce Association for Men (ADAM). Our legal team has an in-depth understanding of complicated family law issues, such as child and spousal support determinations.

Contact ADAM online or call us at (248) 327-0050 for an initial consultation about your case today.

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