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Asset Calculations Involving Service Businesses When Determining Equitable Distribution and Support
Service businesses present a unique challenge when trying to value the business for equitable distribution and determine income for spousal and child support.
Service businesses are defined in very broad terms under the internal revenue code. Generally a service business is not primarily engaged in extractive, harvesting and goods producing activities but in delivering results, such as landscaping, repairs, healing, counseling, litigating, teaching, transporting goods, planning, engineering, etc.
The trap with valuing a service business is that there are more intangible assets, i.e., good will, rather than tangible, i.e. inventory. The "market value" of the service business is also usually tied to a form of human capital dependent upon the future of the labor of the licensee and not separate products or goods sold, which market value is much easier to calculate and separate from the income of the owner of the business.
During a divorce, there is usually a calculation for spousal support/alimony and child support (if applicable) and equitable distribution, which is a division of the marital assets. When one spouse owns one or more service business, there is a danger of double counting the businesses income for calculating support and equitable distribution.
Double counting occurs when income for maintenance purposes has already been converted to an asset and distributed as equitable distribution. Once a court converts a specific stream of income into an asset, the income is not supposed to be calculated into the support formula and payout. However, courts are divided on how to separate the income from the business assets in a service business.
If there is no clear defining way in which to separate the owners' income from the business revenues, double counting is possible and usually occurs. One way to avoid double counting is to meet with a financial advisor or forensic accountant to calculate and separate out an income to the owner from the service business and show the "salary" of the business owner. This could also involve a change in tax filings and structure of the service business. Any such calculation or change should be done prior to getting involved in a divorce situation, especially if the owner believes that separation and divorce are imminent.
Pennsylvania recognizes common law marriages (if united before January 1, 2005).
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