Business owners have a great ability to manipulate income during a divorce. I’m sure you have seen a business owner’s income drop significantly and inexplicably. Then they argue that support should be based on their current income level.
How do they do it?
One way is by using a relatively simple trick of changing the accounting method for revenue recognition. This isn’t apparent in tax returns or business records.
Case in Point: Historically, a company’s accounting practice had always been to recognize revenue when cash was received from its customers. In the year of the owner’s divorce, the practice changed to record money received from the client as a deposit—similar to receiving a retainer.
Deposits appear on the balance sheet, but are not reported as income on the income statement or tax returns. Accordingly, the income was significantly lower in the year of divorce.
After uncovering this maneuver, income available for support purposes increased by $200,000 and the business value increased accordingly.
Bottom Line: Are you considering deposits in your discovery process?