Defining the net income of a self-employed spouse is not a simple task. Often, a divorcing party does not report his/her full income when self-employed. Likewise, income tax returns are not the most reliable source of financial information to base a fair division of marital property or an adequate child support award. Obtaining the financial records of a self-employed spouse in a tightly-held business is a complicated and lengthy process.
Tips for Determining Quantifiable Net Income of the Self-Employed
- Gather all personal checkbooks and banking transactions for the last four (4) years while the parties were together.
- Break down the expenditures into categories to determine how the money was disbursed within the household and the business.
- Isolate personal expenses such as mortgage, taxes, food, utilities, car expenses, and clothing, home improvements, dinners out, and vacations.
- Find expenses that a self-employed spouse spent for personal items such as haircuts, lunch, and general ‘pocket money.’
- Determine the total disbursement of personal expenses and legitimate business expenses within the business.
- Compare what was reported as income on the joint tax returns with what was actually spent on personal items, thus revealing hidden cash or income.
Other income related considerations
- Many professionals own their own office building and the business pays the rent. Depreciation will offset any income, thereby increasing the value of the building at no personal expense. This tax shelter should be added to calculate net income.
- The self-employed may use low-interest loans rather than taking actual income. This financial ‘perk’ should be considered in net income calculations.
- Some self-employed spouses increase their financial debt in order to lessen available income for child support calculations. It is important to know the date of the debt, to reveal the true intent behind the debt. Minnesota Courts may apply adverse inferences to the dissipation of the marital estate, thereby protecting a spouse’s claim to lost income or property.
At Clausen & Hassan, our Minnesota Family Law Attorneys have experience with business evaluations, cash-flow analysis, child support calculations, spousal support calculations and the determination of income for property division. If you have questions about your specific situation, contact us today for your free consultation.