How Business Income Affects Child Support

By Attorney Ian Reardon – For business owners, determining child support can be a bit more complicated. The way income from a business is treated in child support cases is crucial, and courts take a broad look at all sources of income—including income generated from self-employment or owning a business. A recent case in New Hampshire, Makris v. Makris, highlights the important points that business owners need to understand about how their business income can affect child support obligations.

What Is “Business Income” for Child Support?

When calculating child support, courts look at “gross income,” which includes all income from any source. For business owners, this means that any money your business makes can be considered part of your personal income. This is true even if you don’t pay yourself a salary from the business.

In the Makris case, Brian Makris argued that because he didn’t pay himself a salary from his business, the business’s profits shouldn’t count as his personal income for child support purposes. However, the court disagreed. It ruled that even though Makris didn’t formally pay himself, the profits from his business were still income available to him. Essentially, if you own a business and that business generates profits, those profits are considered part of your income when child support is calculated.

Business Profits vs. Salary

Business owners may think that not drawing a salary from their business means they don’t have personal income, but courts look beyond how you structure your pay. The court’s view is simple: if you control the business, then the money it makes is available to you, whether you formally pay yourself or not. In other words, the profits from the business are seen as income, just as they would be if you received a paycheck.

This is not an unusual approach. Courts across the country take a similar view, looking at the overall profitability of a business rather than focusing solely on whether the owner receives a formal salary. This is especially true if you are the sole owner of the business or have significant control over it.

Deducting Business Expenses

While business profits are considered income for child support purposes, legitimate business expenses can be deducted. These expenses must be both reasonable and necessary for running the business. For example, rent for the business location, employee salaries, or the cost of equipment needed to operate the business can be deducted from your gross income before calculating child support.

In the Makris case, the court considered previous cases that laid out this principle. To reduce your income for child support purposes, the expenses must be clearly related to generating income for the business. Personal expenses, even if paid through the business, will not reduce your child support obligation. The court looks carefully at whether the expenses are legitimate and necessary for running the business.

Rental Income and Business Income

Another point that came up in the Makris case was the treatment of rental income. Brian Makris argued that the $1,500 he received each month from a lease agreement related to his business shouldn’t count as his personal income. He claimed that this money went directly to his business, not to him personally.

However, the court disagreed. Even though the rental payments were made to the business, the court found that they were still part of the resources available to Makris for paying child support. This is an important reminder for business owners: rental income, even if it flows through your business, can still be considered part of your personal income if you control how that money is used.

Key Points for Business Owners

If you own a business, it’s important to understand how courts treat business income in child support cases. Here are some key points to keep in mind:

1. Business profits are treated as income: Even if you don’t formally pay yourself a salary, courts will likely count your business’s net profits as personal income when calculating child support.
2. Only legitimate business expenses can be deducted: Expenses must be necessary for generating business income and must be properly documented. Personal expenses disguised as business costs will not reduce your child support obligation.
3. Rental income counts: If your business generates rental income, the court can treat that as personal income, even if the payments go directly to the business.
4. Your control over the business matters: If you are the sole owner or have significant control over how the business operates, its profits will likely be considered available to you, regardless of how you structure your pay.

Conclusion

When it comes to child support, courts take a broad view of income. For business owners, this means that your business profits, rental income, and any other income generated by the business are likely to be treated as personal income. It’s essential to be aware of how these financials will be scrutinized in a child support case.

Business owners should keep detailed records of their income and expenses, ensuring that any deductions claimed are legitimate business expenses. If you’re a business owner facing a child support issue, contact Schoff & Reardon to help you understand your obligations and protect your financial interests.