The amount of income used in the child support calculation is the issue that predominantly impacts cases when or both parents have income from pass-through entities. Businesses with pass-through income are entities which are not taxed itself. Instead, the entity’s income is “passed-through” to the shareholders or members of the entity. Subchapter S-Corporations, limited liability companies, partnerships, limited partnerships, etc. are examples of “pass-through entities”.
As outlined in a prior article, federal income tax returns may not be appropriate in determining the income to be used for child support purposes. Instead, the New Hampshire Supreme Court has determined that the proper measure of gross income for child support purposes is deducting legitimate business expenses from the total revenue received. The New Hampshire Supreme Court states that business expenses must be actually incurred and paid, and must also be reasonable and necessary for producing income in order to be deductible from business income. The Supreme Court states further that the trial court must scrutinize the parents’ financial situation closely and exclude as a business expense any expenditure which the court, in its discretion, finds will personally benefit the parent. When the person who is obligated to pay support is able to control the retention or disbursement of funds from a business, the decisions mandates that such parent has the burden of proving his/her actions were necessary to maintain or preserve the business.
Accordingly, great care is needed when handling cases of self-employment income or income from pass-through business entities. Please consult with an attorney at Hamblett & Kerrigan if you have any questions in this regard.
If you have any questions regarding the calculation of child support, whether in Massachusetts or New Hampshire, please contact an attorney at Hamblett & Kerrigan to discuss. Let Hamblett & Kerrigan use their experience to your advantage.
Kevin P. Rauseo is a former director at Hamblett & Kerrigan P.A. and has since been appointed as a Justice for the New Hampshire Circuit Court. Please feel free to contact another attorney at Hamblett & Kerrigan to discuss your legal issues.