Pursuant to C.R.S. 14-10-115, the statutory section regarding establishment of Colorado child support, the primary financial factor leading to a calculation of support is a litigant’s incomes. As discussed in prior postings, there are basic figures, such as income, number of children, and number of overnight visits per year the payor has with the children, that go into generation of a monthly child support amount. Child support is generally easily calculated when there are two people to the equation, both of whom have traditional jobs with readily discernable income. However, when one person is a business owner, or self employed, the analysis of what income figure should be used for that person becomes more complex. Likewise, challenges can arise related to collection of child support from that self employed person. This posting will address both issues as may arise in the legal arena.
As Denver area child support attorneys, we have seen almost any scenario imaginable related to child support. The one scenario requiring perhaps the most scrutiny relates to ascertaining income for a self employed person. This task can arise not only related to the other party’s income, but also our own clients. As a starting point, C.R.S. 14-10-115(a)(1) sets forth definitions of what is or is not income for child support purposes. Subsection (D) states, “Payments received as an independent contractor for labor or services, which payments must be considered income from self-employment.” Subsection (O) states, “Any money drawn by a self-employed individual for personal use that are deducted as a business expense, which money must be considered income from self employment.” Subsection (W) states, “Income from general partnerships, limited partnerships, closely held corporations, or limited liability companies….” In essence, the funds one takes for personal use under any of these scenarios is considered income for child support calculation purposes.
It is not uncommon for people to have misconceptions of what the actual, personal income for a self-employed person is. Often times, either party may believe that income is derived by looking solely at the gross revenue or gross receipts a business may have. Such is not the case. The key for attorneys when assessing income for a self-employed person is thoroughly segregating salary, draws, or payment of personal expenses from not only the gross revenues of the business or self-employment endeavor brings in, but also from the other normal recurring expenses the business has. Additionally, one must keep diligently assess the legitimacy of those expenses.
Let’s say a solo plumber brings in $12,000 per month in gross revenues, after $1000 building rental, $300 insurance, $500 fuel, $200 phone, and $500 vehicle payment, he or she is left with $9,500. The difference would be the person’s monthly, person income to be used for a child support calculation. Expanding on the first scenario, let’s say that person also pays his or her home mortgage and health insurance premiums out of the business proceeds in the amount of $2000 per month, and declares such as a business expense. Though the IRS would likely allow some or all of those two expenses as an deduction from income, a Colorado family law court is likely going to determine that the $2000 is really payment of personal expenses and keep that $2000 in the calculation of income. Thus, gross revenues are just a staring point.
The key for Colorado child support attorneys is knowing what documents to assess, how to view expenses, and how to determine what expenses are really for personal use. The typical documentation needed will generally be business tax returns, personal tax returns, bank statements, and potentially payroll or other expense documentation. If there are questions, check copies, credit card statements, and other financial documents from the business may also be needed to gain further details. Profit and loss statements might also be helpful, though they are generally prepared either by the business owner or an accountant who gets his or her information from the business owner. The tax returns will generally list the business’ expenses. Those should be thoroughly assessed and, if there is a shadow of a doubt as to legitimacy, the expenses should also be correlated with the bank statements or other documentation. Though risky, a business owner can put whatever he or she chooses into a tax return as an expense. Furthermore, it is not uncommon to see self employed people list expenses right on the tax return that are personal in nature. Additionally, not all business owners prepare a corporate return. Rather some, perhaps like the plumber in the prior scenario, will provide a Schedule C with their personal tax returns, which will set for the same expenses as might be listed on the corporate return. When expenses seem excessive, questions are raised. Beyond deductions which are really personal in nature, there are other intricacies which may need to be looked at. For example, though the IRS allows for deductions for depreciation, statute does not allow for “accelerated” depreciation to be as an income reducing deduction for child support purposes.
Another challenge that can come with ascertaining the income of a self employed person is the fact that record keeping can be a disaster. Often times, small businesses or solo owners keep horrible records. Initially, it can be challenging to get documents from some business owners. Discovery (requests for production of documents) will almost always be required, as normal C.R.C.P. Rule 16.2(e)(2) financial disclosures will not provide enough information. Once documents are obtained, it can be quite an endeavor to go through the information to ascertain revenues and what expenses are legitimate. Often times, self-employed people treat their business accounts as just another personal account, leading to tedious, yet necessary, review. Additionally, many business owners state their income as much lower than what a thorough analysis will reveal. It is up to the attorney to ferret out the income as best he or she can. When there is debate as to cash flow or expenses, the court will ultimately have to decide. In any child support case with a self employed person, the time spent by an attorney investigating and preparing for hearing will be more than if both parties had regular jobs and received normal pay checks. Finally, with self-employed people, business can fluctuate. At times, it may be necessary to persuade the court that several years of income should be averaged. This depends, of course, on which party the attorney is represent and how the trend favors the client, if at all.
Besides ascertaining and proving a self-employed person’s income, other challenges arise once a Colorado child support order is entered. When child support is not paid, statute affords various remedies to the payee to collect. Some of the easier ones can include issuance of an income assignment to collect current/prospective support, or entry of a “support judgment,” followed by a wage garnishment, to collect arrears. These steps can be fairly easily accomplished, with little expense, presuming the payor does not just quit and move onto another job. With self-employed individuals, there is generally no point in seeking an income assignment or a garnishment for support. Either of those documents will ultimately served on the business owner, who is also the other party. Thus, those types of requests can often be ignored. In the end, the primary remedy with teeth can be the filing of contempt of court
proceeding. Though income may not be attachable from a self-employed person, the threat of jail which comes with a contempt of court might be the motivator needed to secure payment. A business cannot run when its proprietor is in jail.
Most family law firms represent both business owners and those seeking to collect child support from them. As such, assistance can be provided related to determining and proving income, as well as guidance on proper record keeping and expense payment for the future. To speak with an experienced Denver child support attorney, call (303) 502-9422.