I often calculate the cash flow for support in my divorce cases. My calculation is used as the basis for child and spousal support orders. While cash flow for support seems like a phrase that defines itself, it has created so much controversy. Cash flow is more obvious among employees. It’s their paycheck. With some exceptions, business owners also receive a paycheck because they are employees of their business. Paychecks are straightforward. Business owners also receive cash and benefits from their business. This is the controversy.
Sources of Cash from the Business
A business has three sources of cash. Its profits (income) are usually the main source unless the business is legitimately struggling. However, its profits can be artificial. Business owners “run” personal expenses through their business. The business pays for their personal expenses and then deducts them as business expenses. The more business expenses a business has, the less its profits. As a divorce forensic accountant, I “add-back” any personal expenses to arrive at the “true” profits of the business. The business owner’s paycheck and its true business profits are the basis for their cash flow for support. A business can also get cash from loans and from selling its assets. While they are sources of cash, they are not sources of cash flow for support.
Marital Lifestyle Paid by the Business
As discussed, the business pays for personal expenses, which often benefits the family. The benefits would be less if the business paid taxes on the “true” profits instead of deducting the personal expenses. I’ve had cases where the family lives on the cash from loans by the business. This is not cash for support. The loans should instead be used for paying its vendors or buying equipment. As a forensic accounting expert witness, I’d argue that loans are investments that should generate cash to repay the lender with leftover profits. Some businesses sell equipment that were once useful. I’ve had cases where the family enjoys this occasional source of cash. This too is not cash for support.
Cash flow for support is controversial and often requires a divorce forensic accountant. If you want to discuss the profits of a business, please call Greg Raffaele at 949.264.1455 for a free one-hour telephone consultation.