Going Corporate With Child Support:
Child support for Minnesota business owners
Child support and corporate/business income are not likely to be high on anyone’s list of their favorite things to think about. When you combine both of them together, they quickly become even less pleasant. For Minnesota business owners, however, a recent Minnesota Supreme
Court decision makes the combination of these two an important consideration in some divorce situations. This is because, as it turns out, your income may be bigger than you think it is, at least for purposes of calculating your child support, if you are a shareholder in a closely-held subchapter S corporation.
S Corporations Background
While that sounds awfully specific, it’s a situation that is applicable to many people. A subchapter S corporation is essentially a small business in the corporate world. S corporations have fewer than 100 shareholders and only one class of stock. The shareholders are, in general, actual people rather than companies.
The tax advantages of S corporations make them a popular choice of business structure. It avoids “double taxation” by passing all corporate income and losses through to the shareholders; only the shareholders are taxed, not the corporation itself. S corps are probably the most popular form of small business corporation
A closely-held corporation means it may be even smaller than your average S corporation. In general, closely-held corporations have more than 50 percent of their stock owned by 5 or fewer individuals. So, this category includes pretty much all the family businesses of the world. This means that there are lots of Minnesotans involved in closely-held subchapter S corporations, and it’s a pretty safe bet that many of them will also be involved in a child support dispute at some point in their lives.
Haefle v. Heafele AKA “Game Changer”
Now that we’ve established why you should care, let’s talk about what happens if you, as a shareholder in one of these corporations, are facing child support litigation. As you may have learned already, the amount of child support ordered will depend on :
- The income of the Mother.
- Income of Father
- Percentage of Overnights each parent has as laid out in the Order.
With “normal” W-2 wage earners it’s pretty easy to tell what a person’s income is, however with small (or large) business owners it’s easier to reduce taxable income by being careful about what is deducted and allowed by IRS rules. Enter Hafele v. Haefele.
The problem is, while the amount of income someone is earning might be obvious in some cases, it can be unclear in others. What the Minnesota Supreme Court recently has decided in a case called Haefele v. Haefele is that a parent’s income from joint ownership of a closely-held subchapter S corporation counts as “income” when a court is determining child support. This is true regardless of whether the parent is actually keeping the money or just distributions for income tax purposes. It’s also true regardless of whether or not the parent has any control over the amount of the distributions or not.
A “side note” when a S corp does it’s taxes a document called a K-1 is generated, this is what the IRS looks at as additional taxable income above what the corporation actually paid the owner/employee. The reason is a bit long winded, but let’s just say that Uncle Sam wants his share and wont let you deduct EVERYTHING for taxes.
This result came in part because Minnesota law states very clearly that income from joint ownership of a closely-held corporation is a form of self-employment, which is definitely income for child support purposes. If you are a shareholder of a closely-held subchapter S corporation, you may feel that this unfairly characterizes your income as much higher than it actually is. You may not be using any of the corporate income, and it might be unreliable as a source of child support. However, the good news is that even after calculating income, a court should still consider all the overall circumstances of each parent in setting a final child-support obligation. In other words, the court won’t blindly stick a child-support amount on you because of your income on paper.
Interested in seeing how the Haefele case could impact your child support or the amount of child support your receive? Well here’s my shameless plug for business! Send me an email or call and I’ll look at the facts and see if I can help you. For more general questions (or if you’ve no intent to actually hire a lawyer) please put a comment down below. Thanks.