In CA Alimony and Child Support Matters Expense Deductions on the Tax Returns of Small Business Owners Will Be Carefully Reviewed by the Court

Business Owners: Why Your Tax Return Doesn’t Dictate Support in California: When Addressing Alimony and Child Support Matters Expense Deductions on the Tax Returns of Small Business Owners Will Be Carefully Reviewed by the Court

 

If you own a small business or are divorcing someone who does (or you are in a child support case with someone who owns a small business), there is a common misconception that the “Adjusted Gross Income” on a tax return is the final word on child or spousal support.

In California, taxable income is not the same as support income.  The Burden of Proof that business deductions should be accepted is on the business owner to justify the deductions. This is the Marriage of Hein Rule

A landmark 2020 case, In re Marriage of Hein, changed the landscape for self-employed parents. The court ruled that when a business owner claims significant deductions to reduce their available income for support, the burden of proof is on the business owner to justify those expenses.

In the Hein case, the husband—a farm owner and president of two corporations—attempted to use heavy depreciation deductions on equipment and vehicles to lower his support obligations. The trial court initially accepted his tax returns as correct. However, the Appellate Court reversed this, stating:

“Claiming a depreciation deduction on federal tax returns does not involve an outlay of cash with a corresponding reduction of cash available for support.”

Why Your Tax Return Might “Lie” About Support

The IRS allows many deductions to encourage business growth, but California Family Law is concerned with actual cash flow available to support a child or ex-spouse. Common “add-backs” that courts often ignore when calculating support include:

• Depreciation: While equipment wears down, depreciation is a “paper loss,” not a monthly cash payment.
• Section 179 Expenses: Large one-time equipment purchases.
• Personal Use of Business Assets: Using a company car, cell phone, or travel meals for personal benefit.

Whether You Pay or Receive Support, Strategy Matters

• For the Support Recipient: You have the right to challenge “creative accounting.” If your spouse’s lifestyle doesn’t match their reported business income, the court can “add back” those deductions to increase support.
• For the Business Owner: You must be prepared to prove that your expenses are “required for the operation of the business.” Simply handing over a tax return is no longer enough; you need clear financial records and a cohesive legal strategy.

Why You May Need a Forensic Accountant

Because the “burden of proof” is so high, many cases require a forensic accountant. These experts peel back the layers of business ledgers to determine the true cash flow.

Takeaway for people involved in a California divorce in which the spouse owns a small business: If  you or your spouse claims a significant income decrease due to business expense deductions when determining spousal or child support the burden of proof is on the owner spouse to prove the court should accept the deductions. The owner spouse’s tax return is not dispositive. In these cases, you might need a forensic accountant: someone with specific expertise and knowledge regarding the business expenses. Not all expenses which are appropriate tax deductions are allowed when calculating alimony or child support. Real property depreciation,  business property depreciation, deductions related personal automobiles can all be appropriate for tax purposes and yet they may not reduce the income of the payor which is available for support. 

At Galen Gentry Law Group, we work with financial experts if necessary and we always ensure support orders are fair, accurate, and based on reality—not just tax strategy. Contact us for a free Strategy Session.