Cash-based business is a term that refers to companies that take most or a large percentage of their payments in cash. This setup often involves less documentation than other business structures. However, it can create legal complications and problems with the Internal Revenue Service (IRS). During a divorce, a cash-based business can also create additional hurdles as couples try to resolve issues such as child support, alimony, and division of marital property.
Determining Support with a Cash-Only Business
A recent client of the firm was divorcing her husband, and the couple owned a cash-based restaurant/bar together. She claimed the business income was between $8,000 to $10,000 per month, while her husband put the business income between $1,500 to $2,000 per month. After the husband spent five years in their home country, he returned to the U.S. and took control of the business. Fearful of her husband, our client moved out of the marital residence and was ousted from working at the restaurant. She was left with no income. The client was aiming to negotiate $8,000 per month in spousal support. However, problems arose when reports showed the couple had only filed taxes on $21,000 of annual income.
In such a situation, the spouse seeking to establish the true income of the business must establish, with evidence, what it is. Doing this requires calculating expenses, and looking at bank transactions, credit card statements, and money orders. Getting this information is not always easy. Evidence that the couple’s monthly expenses were $5,000 per month when their income was only $1,500 raised questions about the credibility of the husband’s income claims. Apart from the wife’s testimony, the services of a forensic accountant may be necessary to uncover important hidden information.
In a case like this, proving the actual income of the business is not the only challenge. If the judge finds the wife is credible, and that the business’s income exceeds the amount they reported on their tax return, new issues are introduced such as the following:
1. How support payments can be enforced. If the business is not utilizing W-2 forms for wage earnings, traditional enforcement, such as garnishing wages cannot be implemented to make support payments.
2. Potential legal & tax implications of the discrepancy between reported and demonstrated income. If the husband is required to pay $8,000 in monthly support, but he is only claiming an annual income of $21,000 for taxes, a question arises regarding the legal impact.
As in most family law cases, understanding how to address specific goals and circumstances for the case is key to a successful outcome. In addition to creative case preparation and strategy to overcome objections, you want an attorney who understands the full implications of all the facts in your case, and can anticipate the next steps as the case proceeds.
Our client’s case is a prime example of the difficulties that arise when determining appropriate spousal support during divorce involving a cash business. For any divorcing couple, the court will consider factors such as each spouse’s income, their ability to work, and their general needs. When a couple owns a business, their tax documents give a clear picture of their earnings and the business’s value – two important aspects to consider when determining spousal support. Cash-only businesses can result in blurred lines when calculating these factors.
Likewise, many divorcing spouses also face the issue of child support. States calculate child support based on several factors. In addition to considering the number of children, their needs, and their standard of living before the divorce, the court will look at each parent’s income. Attorneys refer to their clients’ financial and tax records to illustrate their monetary resources and financial needs. However, cases involving cash businesses can mean inaccurate representation of a spouse’s finances. When it comes time to determine child support, figuring out which parent owes can be difficult.
Dividing a Cash-only Business as a Marital Asset
A business is a major marital asset to divide during divorce, especially in equitable distribution states like Pennsylvania and New Jersey. Valuing a business is a complex process that involves analyzing its assets, both tangible and intangible property, and liabilities (such as rent, equipment leases, credit lines, and more). Often, the business valuation process begins with a qualified appraiser’s full inventory of the company’s property. But when a company is cash-only, showing its value can be challenging.
What to Do if You’re Getting Divorced
To work toward a resolution as efficiently as possible, an experienced attorney may work closely with a financial expert to uncover important facts and appropriately value a cash business. The more knowledge and understanding the attorney has about such complexities, the better able he or she is to help reach a settlement or advocate for the client in court.
Figuring out how to equitably divide any business is critical to a successful divorce. Getting the help of an experienced law firm is key. If you have decided to dissolve your marriage, and have complicated issues such as a cash-based business we can help. Feel free to contact Petrelli Previtera LLC to schedule a consultation.