Accurate income figures are essential to child support calculations, but obtaining and agreeing on true income, especially when a parent is a business owner, can be a challenging process. Significant adjustments to reported income and expenses may have to be made to reflect the true economic benefit the parent derives from the business. Nicholas Bourdeau’s Determination of Income for Child Support walks you through the areas where income adjustments are most likely to be found. In this excerpt, Mr. Bourdeau explains the art of predicting future business income.
Averaging Historic Income
Normally, historic business income is analyzed to enable an investigator to predict future business income. Since income from a business operation may vary considerably from year to year, part of the analysis usually entails averaging a number of years of operations. The number of years averaged may be mandated by local rules, but generally the results of five years of operations will provide an investigator enough information. It should be noted that although five years of operations may be reviewed, the investigator may find that the use of all five years may not be appropriate. For example, assume that in the first year of operation a business incurred a big loss, but subsequent years were profitable. The first year of operation is not a good indication of future income. The investigator may consider that eliminating that first year of operation from the average would produce a more equitable result.
Revenue Dips in Year before Divorce
A business operation will normally generate (or report) less revenue in its last year of operation before a divorce when compared to other years of operation. Most child support calculations are performed in conjunction with a divorce. Divorces, for numerous reasons, negatively affect business operations. For example, a business owner, instead of doing business, is dealing with his divorce. He takes time away from work to deal with his attorney, his experts, and his soon to be ex-wife. The owner can also become super mom or dad, leaving his or her business to maintain a bond with the children of the marriage. New romantic partners can also distract a business owner. On the darker side, the business owner can intentionally reduce the income of a business by refusing contracts or putting business off to future periods (sandbagging). Owners can also claim (or increase their claim of) personal expenses to reduce the income of a business. Owners can also fail to report revenue that was reported in previous periods. The incentive for these activities is high. Not only is child support based upon the income of the business, but the marital estate value of the business can also be based upon the income of the business.
Investigators should be aware of this nearly universal phenomenon and take steps to compensate for it. These steps could include putting into play investigative procedures to identify differences between the last year of operation and other years. For example, an investigator could compare the expenses claimed in the last year of operation to the previous year on a line by line basis and review in detail the causes of significant differences. The investigator could also consider removing the last year of operation of the business from the average as not being representative.
Nicholas L. Bourdeau is a forensic accountant with experience in over 1,000 family law engagements. He has appeared in court over 150 times on issues associated with the valuation of marital estates, businesses, child support, maintenance, pensions, fraud, and damages. He is the author of child support software that is widely used in Montana.