The determination of child support and maintenance (formerly known as alimony) is dependent upon the determination of a payor’s net income. If said payor is a business owner, the business may be able to substantially reduce its reportable business income resulting in a substantially smaller income assignable to the business owner payor. The reason is “Bonus Depreciation”. Bonus Depreciation may also be impactful on a business’ fair market value and therefore property allocation between two (2) married persons.
Specifically, due to the recent tax changes under the Tax Cut and Jobs Act passed in December 2017, business owners can now take a special depreciation allowance to recover part of the cost of qualified property (as defined by the IRS) placed in service during the tax year. The allowance applies only for the first year you place the property in service.
Bonus depreciation is a special first-year allowance that is an addition to the section 179 deduction. The underlying purpose of this new Bonus Depreciation was to stimulate the economy by providing significant tax advantages for the acquisition of qualified property. While this is an obvious advantage to the business owner, it will undoubtedly impact cash flow, the timing of equipment acquisition, and reportable income; all of which are integral when determining a spouse’s income, the value of a business entity, and the allocation of the value of said business entity.
For example, if a business owner/spouse is encouraged to purchase additional equipment (e.g. invest funds otherwise available to be distributed to the business owner into the acquisition of equipment), the cash flow of the company is impacted by the outlay of cash for the purchase of said equipment, financing, or the like. The greater acquisition of qualified property, the greater corresponding Bonus Depreciation tax deduction. The combination of additional expenses and a greater tax deduction, will reduce the reportable “income” and the actual cash flow. The less income, the less support (e.g. child support and/or maintenance).
Further, dependent on the type of qualified property, a business owner is only entitled to deduct the Bonus Depreciation in the year in which the equipment is placed in service and the entirety of said reported Bonus Depreciation is a qualified deduction for purposes of determining the business’ net income. This could result in a seemingly substantial reduction in business net revenue in the year in which a divorce is pending and a substantially greater business net revenue the following years since the depreciation may not be available or will be substantially reduced resulting.
Though our Illinois statutes permit the Courts to exclude this accelerated component of depreciation if found to be excessive when determining net business income, this one issue could easily create significant debate. (See 750 ILCS 5/505). Since 2018 was the first full year in which the Bonus Depreciation deduction was available and in light of the impending tax deadline, one should consult with both a Certified Public Accountant and his/her Domestic Relations Attorney to best prepare for this potential dispute.
Jessica Wrinkler Boike ; Divorce and Family Law Partner