Child support and maintenance (formerly known as alimony) in Illinois are determined by both parties’ incomes.
A business owner does not receive just a check every two weeks and a W2. A business owner has ongoing revenue and expenses that have to be calculated to determine the business owner’s income. Beyond that, business owners have future income and expenses in the form of accounts receivable and accounts payable. Some of these sources of income and some of these expenses are under the control of the lawyer…and some are not. How does one accurately determine a business owner’s income in an Illinois divorce.
To further complicate the matter, for business owners, it is always feast or famine: business is either booming or business is collapsing. When a business owner is getting a divorce, the business suffers. More importantly, a business owner who may be liable for support will be greatly incentivized to portray his income as struggling. How does a business owner prove his income is legitimate? Conversely, how does a business owner’s spouse or co-parent prove a business owner’s income is being manipulated by the business owner?
How Is Support Calculated In An Illinois Divorce Or Parentage Action
Maintenance and child support are both determined based on the net income of both parties.
“Maintenance…shall be calculated by taking 33 1/3% of the payor’s net annual income minus 25% of the payee’s net annual income…[not to exceed] 40% of the combined net income of the parties.” 750 ILCS 5/503(b-1)(1)(A)
“The court shall compute the basic child support obligation by taking the following steps:(A) determine each parent’s monthly net income;(B) add the parents’ monthly net incomes together to determine the combined monthly net income of the parents;(C) select the corresponding appropriate amount from the schedule of basic child support obligations based on the parties’ combined monthly net income and number of children of the parties; and(D) calculate each parent’s percentage share of the basic child support obligation.” 750 ILCS 5/505(A)(1.5)
In an Illinois divorce or parentage action, for the purposes of support, net income is not just the money left over after taxes.
“[I]n determining appropriate child support, we are not bound by the technicalities of federal income tax law.” In re Marriage of Ackerley, 333 Ill. App. 3d 382, 392 (Ill. App. Ct. 2002)
Rather, “net income” for the purpose of support is calculated by determining the gross income of the parties.
The Illinois Marriage and Dissolution of Marriage Act always has the maintenance support defer to the calculations of income as described by the child support section of the Act.
“Gross income. For purposes of this Section, the term “gross income” means all income from all sources, within the scope of that phrase in Section 505 of this Act, except maintenance payments in the pending proceedings shall not be included.
As used in this Section, “net income” has the meaning provided in Section 505 of this Act.” 750 ILCS 504(b-3)
““[N]et income” means gross income minus either the standardized tax amount” 750 ILCS 5050(a)(3)(B)
“[G}ross income” means the total of all income from all sources” 750 ILCS 5050(a)(3)(A)
“[S]tandardized tax amount” means the total of federal and state income taxes for a single person claiming the standard tax deduction, one personal exemption, and the applicable number of dependency exemptions for the minor child or children of the parties, and Social Security and Medicare tax calculated at the Federal Insurance Contributions Act rate. 750 ILCS 5050(a)(3)(C)
How Support Is Calculated For Business Owners In An Illinois Divorce or Parentage Action
The calculation of gross income minus standard deductions doesn’t really work for business owners because business owners have expenses beyond the standard deduction contemplated by the statute.
“For purposes of calculating child support, net business income from the operation of a business means gross receipts minus ordinary and necessary expenses required to carry on the trade or business.” 750 ILCS 5/505(a)(3.1)
This is where things get tricky. Business owners have many expenses like a company car, business dinners, etc., which are an Illinois divorce or parentage court can disavow as an expense, thereby increasing the business owner’s net income.
“[A]ny business expenses determined either judicially or administratively to be inappropriate or excessive shall be excluded from the total of ordinary and necessary business expenses to be deducted in the determination of net business income from gross business income.” 750 ILCS 5/505(a)(3.1)
Illinois courts have great leeway in determining what deductions will be counted against the gross income of the business.
“A trial court has broad discretion to determine whether a parent’s claimed business losses are reasonable for purposes of calculating child support” In re Marriage of Bradley, 2011 IL App (4th) 110392
How Illinois Divorce Courts Really Determine A Business Owner’s Income
Domestic relations judges are NOT businesspeople. They do not enjoy getting into the weeds of determining what is or what is NOT a legitimate business expense. But, a judge must determine a business owner’s true income.
“[T]he circuit court has a duty to make its own calculation of a parties’ income.” In re Marriage of Evanoff, 2016 IL App (1st) 150017
Because of this responsibility, judges will be eager to appoint a fiancial expert (usually an accountant) to determine exactly what is the businessperson’s legitimate income.
“The court may seek the advice of financial experts or other professionals, whether or not employed by the court on a regular basis. The advice given shall be in writing and made available by the court to counsel. Counsel may examine as a witness any professional consulted by the court designated as the court’s witness. Professional personnel consulted by the court are subject to subpoena for the purposes of discovery, trial, or both.” 750 ILCS 5/503(l)
The devious businessperson will be loath to have their books examined by a forensic accountant. The devious businessperson will claim that the business is failing so badly that they cannot afford an accounting. After such a protest, the other party should say, “if you can’t afford an accounting, it’s time to get a real job.”
A financial expert will be paid from marital assets and the expenses can be later reallocated when the business’s income is determined.
“The court shall allocate the costs and fees of those professional personnel between the parties based upon the financial ability of each party and any other criteria the court considers appropriate, and the allocation is subject to reallocation under subsection (a) of Section 508. Upon the request of any party or upon the court’s own motion, the court may conduct a hearing as to the reasonableness of those fees and costs.” 750 ILCS 5/503(l)
If the business owner has, in fact, hid their income in their business’s expenses, the business owner can be expected to pay for the financial expert out of their final allocation of marital expenses.
Financial experts are not all bad for a business owner. A financial expert can help explain to the court that retained earnings (another financial concept) should not be counted as income.
Business owners need not distribute their profits to the owner. Some profits get retained for future expenses and investments. These retained earnings are not counted as income if they are legitimate. Retained earnings will not be counted as income if the “retained earnings [are] necessary and appropriate business actions and [are] not excessive” In re Marriage of Moorthy, 2015 IL App (1st) 132077
Imputation Of Income If An Illinois Business Owner’s Income Cannot Be Determined
Should a business owner’s finances be so opaque that a financial expert cannot determine the business owner’s income, support will be ordered based on an imputation of income and/or what is reasonable to support the ex-spouse/children.
“If a parent is voluntarily unemployed or underemployed, child support shall be calculated based on a determination of potential income. In determining potential income, the court shall consider the specific circumstances of a party, to the extent known, including, but not limited to, the parent’s:
(1) assets;
(2) ownership of a substantial non-income producing asset;
(3) residence;
(4) employment and earning history;
(5) job skills;
(6) educational attainment;
(7) literacy;
(8) age;
(9) health;
(10) criminal records and other employment barriers; and
(11) record of seeking work.
The court shall also consider the local job market, availability of local employers willing to hire the parent, prevailing earning levels in the local community, and other relevant background factors in the case.” 750 ILCS 5/505(a)(3.2a)
If the evidence analyzed with these factors is not clear enough for the court to come to a conclusion regarding imputation, the court can award support that is reasonable pursuant to the needs of the support receiver.
“[I]n cases where there is no credible evidence of net income, a court is compelled to make the award of…support in an amount that is reasonable in the case.” In re Parentage of I.I., 2016 IL App (1st) 160071, ¶ 57 (citations omitted)
No matter what, the business owner is going to pay some kind of appropriate support if they are determined to be the “bigger earner”. Otherwise, if the business is determined to be a non-lucrative hobby, the business owner’s income will be imputed upwards to the point where they are not going to be entitled to support themselves.
If you own a business or you are married to someone who owns a business you cannot presume that tax returns alone will determine the support awarded by an Illinois divorce court. You must retain a lawyer who has experience in valuing a business and determining that business’s income. Contact my Chicago, Illinois family law firm today to speak with an experienced Illinois divorce attorney.
