By Mitzi Hollenbeck
A lot of people dream about being their own boss. Often, the notion of freedom from schedules, supervisors, and other people’s expectations can mask the many challenges that come with running a business.
Once a business is off the ground and everything settles into a rhythm, the owners can enjoy the fruits of their labor. That is, unless something unexpected happens – especially if that something is divorce and any related child support obligations. The self-employment income that once seemed so promising becomes the crux of many matrimonial disputes and an area ripe for litigation.
Every four years, federal regulations require that the Massachusetts child support guidelines be reviewed for relevance, accuracy, and to monitor the guidelines that have been in place since the last review. Based upon various child support cases and repeated confusion with the existing guidelines, the most recent review clarified some of the confusion surrounding income available for support while adjusting the incremental costs of raising a child in the current environment.
The new guidelines went into effect September 15, 2017, and apply to all child support orders and judgments moving forward. Two major updates under this review include:
- Capping the maximum amount of college costs required to be paid by a party to an order; and
- A support change factor related to the anticipated reduced costs of raising a child after he/she has reached the age of 18.
Determining self-employment income
The determination of self-employment income is a complicated area, resulting in a large amount of matrimonial litigation work.
The child support guidelines task force cites many cases on the determination of self-employment income, and notes deductions that may be allowed in the determination of tax- able income that may not be determined to be reasonable and necessary to the production of income. Therefore, it is important to note that income reported on a properly filed tax return may not reflect actual income to be used in the measurement of a child support obligation.
Specifically, depreciation expense, which is a non-cash expense, is cited as an element of the determination of business income, which may be available to pay child support. Furthermore, the modifications refer to the concepts of undistributed earnings of an S-corporation, and rental income from marital assets, in determining the amount of gross income to be available for support obligations.
All of these clarifications serve to make the determination of self-employment income even less clear for those untrained in these situations. Specific experience and familiarity with privately-held businesses will help to significantly support or to refute a claim.
Matrimonial and child support litigation is a complex and nuanced area of law, which can be fueled by emotions, resulting in clouded judgment. It is imperative to consult with objective professionals, knowledgeable in the areas of tax and accounting, in order to determine a client’s exposure and to alleviate some of the potential unknowns with regard to the client’s future finances. When faced with uncomfortable situations, you want the best support on your team in order to come to a fair and complete resolution, backed by financial facts.
Mitzi Hollenbeck, CPA, CFE, is a partner with Citrin Cooperman. She can be reached at email@example.com or (781) 356-2000.