One of the most challenging parts of divorce occurs when the income that supported one family is not sufficient to support two households post decree. If a family is very comfortable and has little debt going into the divorce, figuring support out can be done relatively easily. However, if a family has been living paycheck to paycheck and is carrying significant consumer debt, the solution of how they will move forward can be extremely challenging and particularly so, when one of them is self-employed.
There are many reasons for this. First of all, income from self-employment is different from wages. It can vary in amount month to month based upon the owner’s efforts, the economy, or forces beyond the control of either party. Second, there is a very well known phenomenon referred to by divorce attorneys as “RAIDS” – Recently Acquired Income Deficiency Syndrome. It is truly amazing how often someone’s income takes a mysterious dive just as a divorce is lurking. And it is suspicious when the person who controls how much they work; what bills they pay and don’t pay; what jobs they take, ends up earning far less during a divorce than they did before.
But not everyone is a malingerer who is earning less because of the reality that the more a spouse earns, the more they will likely have to pay in support – sometimes the reason is a bit more obvious. Divorces are difficult and the stress of being the unwilling participant can legitimately impact a person’s ability to function optimally. Severe depression occurs all too frequently during a divorce and that impacts a person’s ability to function at work.
Even if there isn’t a problem with changes in income that appear to coincide with the divorce, there is still a problem with self-employment income, because the money that goes into the bank rarely reflects all the benefits of owning a small business. That’s because; when the business pays for the owner’s car insurance; or makes the car payment; or provides a cell phone, these legitimate business expenses also subsidize what the owner would otherwise have to pay out of pocket. It is exactly these types of expenses that reduce a person’s normal expenditures, which the support statutes recognize as an “in-kind” benefit. That means that beyond what cash a person earns from their company, the court will include, in their income, the value of all the other things that the company supplies as ‘in-kind’ benefits.
These hidden benefits are sometimes difficult to quantify. For example, there are cases where business owners travel to “seminars” with their entire families, or purchase luxury vehicles or sports vehicles to entertain clients. Golf and country club memberships, travel upgrades, various types of insurances, meals and entertainment, computers, cell phones, cars, and many other perks can be considered by the court when it comes to support.
While most small business owners are able to legitimately deduct multiple expenses from their taxable income, those same benefits will be realized in divorce court as part of their income in addition to their taxable income.
Ann Gushurst has been practicing exclusively in Family Law for most of her law career, and her current practice is a mixture of litigation, collaboration and mediation. She was recognized by The Best Lawyers in America© in 2018 for family law and was selected to Colorado Superlawyers from 2010-2018. She was also included in the list of Top 50 Women Lawyers and Top 100 Lawyers.