Calculating Income for Child Support – Can You Deduct Your Dog Grooming Expense? (He greets clients in your office.)
As forensic accountants, we are often asked to assist in divorce cases in order to determine the income of one, or both of the parties to help the Court decide the child support and spousal maintenance obligations. Often in these cases, the husband or wife is self-employed or owns a family business. One of the more controversial parts of our engagement is evaluating the expenses of the company which have been deducted from gross earnings on the tax returns and financial statements of the company. The Arizona Child Support Guidelines state that gross income for child support means gross receipts minus ordinary and necessary expenses required to produce income.
When we review the listed expenses, we must ask the question: “Should the reported expense amounts be considered ordinary and necessary business expenses for the generation of income, or should they be classified as personal or owner discretionary expenses, and therefore, not deducted from the gross receipts for purposes of child support?”
Here are just a few of the examples of interesting expenses we have seen and explanations we have heard over the years:
- “I have to look great in my job”. Although some jobs such as acting and modeling require these types of expenditures, for the average business owner the cost of clothes, dry cleaning bills, haircuts or plastic surgery are not deductible for determining income for child support purposes.
- “My job stresses me out and gives me severe back pain.” I can relate, but the cost of massages and spa days are not deductible.
- “I was late for a business meeting.” Although we see speeding tickets and even traffic school listed as expenses, they are not deductible for calculation income for child support.
- “I work out of my home.” Although this is true for many people, the expenses deducted must be reasonable. We have seen clients deduct everything from the cost of their groceries, pool maintenance, expensive home renovations and their entire mortgage.
- “I am entertaining clients.” Ah yes, the most common explanation for questionable deductions such as boats, cabins, sports tickets, and fancy meals. We also often see a lot of family entertainment deducted – miniature golfing, skating and water parks. It is the forensic accountant’s job to sift through these expenses and make a reasonable determination of what is “ordinary and necessary” for the generation of income.
By Julia Miessner, CPA, CFF