Three ways a spouse may attempt to reduce income to lower support in matrimonial matters
As business valuators and forensic accountants, we are frequently asked to assess the “true” income of a spouse in divorce matters. The payor spouse may present a reduced income with the objective of paying less support. This blog sets out three ways that a spouse may attempt to reduce income:
1. Not Distributing Income Earned in a Corporation
For example, a husband owns a business from which he earned a $500,000 salary in 2013 and 2014. In 2015 and 2016, he decides to reduce his salary to $300,000. The husband attempts to lower his support based upon claims that the salary was decreased because the business needed the money.
How Business Valuation Corrects This…
The courts will consider the amount of income that could have been distributed to the husband, commonly referred to as “attribution of income.” Business valuators will examine the relevant business reasons for retaining income in the business and will provide an assessment of an appropriate amount of income that could be attributed.
2. Expensing Personal Expenditures in a Corporation
In this example, the husband may attempt to reduce the corporate income by having his company pay for and deduct his personal expenditures as a corporate expense. In doing so, he attempts to avoid having these expenditures taken into consideration when support payments are calculated.
How Business Valuation Corrects This…
Business valuators will review the books and records of the company to identify any personal expenses. Such expenses will be added to the husband’s income. In addition, since the husband receives income tax savings from the corporation by deducting these expenses, the business valuator will calculate and include the benefit of the tax savings in his income for support purposes.
3. Not Reporting All Income
There is frequently a disconnect between the lifestyle of a spouse (e.g., type and location of residence, cars, vacations, private schools, etc.) and the relatively low income reported on his or her personal income tax. This can mean that the spouse is not reporting all of the income he or she earns.
How Business Valuation Corrects This…
Business valuators will use a technique referred to as a “lifestyle audit” to uncover unreported income. This involves a review of the business owner’s personal expenditures by examining his personal financial statement sworn for family law purposes, personal bank accounts, brokerage accounts and credit card statements, etc. and comparing this to the total of the income sources. Any significant discrepancy would need to be explained. Otherwise, it is possible for the business valuator to calculate the implied level of income required to support the level of expenditures.
A Business Valuation Keeps your Settlement Honest.
The income reported on a spouse’s personal income tax return can be substantially lower than his or her true income. A business valuator provides valuable independent evidence of the true income of a spouse.
To ensure that you have a financial expert who can help you objectively calculate a spouse’s income, contact us to book an appointment with one of our business valuation experts.