For business owners and their spouses, determining income in a divorce is rarely as straightforward as reviewing a W-2 or tax return. Unlike a traditional salaried employee, a business owner’s compensation often extends beyond a paycheck and may include distributions, retained earnings, company-paid expenses, deferred compensation and other financial benefits that contribute to the family’s lifestyle.
In many cases, the central question is not simply what income was reported, but whether the reported income accurately reflects the financial resources available to the business owner.
Looking Beyond the Tax Return
Tax returns are an essential starting point, but they seldom tell the whole story in a divorce involving a closely held business.
Many business owners legitimately structure their finances in ways that minimize tax liability. A company may pay for vehicles, travel, meals, club memberships, cell phones or other expenses that are deductible for tax purposes. Those deductions may be entirely appropriate from an accounting perspective, yet they may also provide a personal economic benefit that is relevant when determining income in a divorce.
This is where the distinction between tax law and family law becomes important.
An accountant prepares financial statements and tax returns to comply with the Internal Revenue Code. A divorce attorney evaluates those same financial records through the lens of Illinois family law, asking a different question: What financial resources are actually available to the business owner for purposes of support and property division?
Determining a Business Owner’s True Income?
Because business income can be significantly more complex than employment income, attorneys frequently examine far more than annual tax returns. A comprehensive review often includes what I describe as a “belt-and-suspenders” approach — analyzing multiple financial sources to ensure that no piece of the picture is overlooked.
Depending on the circumstances, that review may include:
- Business and personal tax returns
- Financial statements
- General ledgers
- Profit and loss statements
- Balance sheets
- Bank records
- Credit card statements
- Partnership, operating or shareholder agreements
- Loan applications and other financial disclosures
In many cases, attorneys also work closely with forensic accountants or business valuation experts. These professionals can perform a normalization of income analysis, which adjusts financial records to account for personal expenses paid through the business, one-time transactions, extraordinary losses or gains and other items that may distort a business owner’s ongoing earning capacity.
The objective is not to inflate or reduce income artificially. Rather, it is to develop the most accurate picture possible of the financial resources available to the parties.
Are Company-Paid Expenses Considered Income?
Not necessarily.
Whether a business expense should be treated as income depends on the specific facts of the case. Some expenses are legitimate business costs that provide little or no personal benefit. Others may reduce a business owner’s personal living expenses and therefore become relevant when determining income for support purposes.
There is no one-size-fits-all rule. Each expense must be evaluated individually and in the context of the business’s operations.
Importantly, this analysis does not imply that a business owner or accountant has done anything improper. Many expenses are correctly deducted under applicable tax laws. Divorce simply requires a different legal analysis than tax preparation, and the same financial transaction may be viewed differently depending on the issue being decided.
Protecting Confidential Business Information
Business owners understandably have concerns about producing sensitive corporate records during a divorce. Financial statements, customer information, contracts, pricing data and proprietary business information may all be highly confidential.
At the same time, meaningful financial disclosure is essential to ensure that both parties — and ultimately the court — have an accurate understanding of the business owner’s income and financial circumstances.
Courts routinely address these competing interests through carefully tailored discovery procedures and protective orders. Protective orders can limit who has access to confidential information, restrict how documents may be used during litigation and require the return or destruction of sensitive records after the case concludes.
Whether representing the business owner or the spouse of a business owner, the goal is the same: to obtain the information necessary for a fair and accurate financial analysis while protecting legitimate business interests.
Experience Matters
Determining a business owner’s income is one of the most complex financial issues in divorce litigation. It requires a thorough understanding of financial records, business operations, tax concepts and Illinois family law.
An experienced divorce attorney, working alongside qualified financial experts when appropriate, can help ensure that income is evaluated accurately and that the financial issues are resolved fairly for both parties.