Understanding Depreciation and Amortization in Child Support Calculations: A Closer Look
/When it comes to determining income for child support calculations, certain deductions such as depreciation and amortization can become points of contention. This blog post aims to provide clarity on whether amortization, specifically related to business start-up costs, should be considered an expense that reduces a party’s income for the purposes of calculating child support in California.
Depreciation vs. Amortization: Key Differences
Depreciation is the process of allocating the cost of a tangible asset over its useful life. For example, in a manufacturing business, specialized equipment that must be replaced periodically incurs real economic loss over time. This loss is recognized through depreciation, which spreads the cost of the asset over its useful life.
Amortization, on the other hand, refers to spreading the cost of an intangible asset over its useful life. This often includes start-up costs for a business. Like depreciation, amortization is a non-cash expense, meaning it is a conceptual cost rather than an actual out-of-pocket expense.
Legal Considerations in Child Support Calculations
Under the new Family Code Section 4058, effective September 1, 2024, annual gross income for child support calculations is defined to include:
Income from various sources such as wages, salaries, bonuses, and rents.
Income from the proprietorship of a business, reduced by expenditures required for the operation of the business.
The critical issue is whether amortization should be added back into the income for child support calculations. While depreciation and amortization are both tax deductions, they do not involve actual out-of-pocket expenses. Therefore, they are not traditionally considered allowable expenses for child support purposes.
Insights from Case Law
In the case of Marriage of Hein (2020), the court examined the treatment of depreciation and section 179 deductions. The court held that:
Depreciation for equipment and other business assets, as well as section 179 expenses, should not be treated as statutory deductions in calculating income available for child support.
The reasoning is that depreciation and similar accounting entries do not involve the actual outlay of funds in future years. Hence, these should not reduce the income available for child support.
Practical Implications
Given the court's stance in Hein, it is likely that amortization related to business start-up costs will also not be treated as a deductible expense for child support calculations. The underlying principle is that child support calculations should reflect the actual income available, excluding non-cash deductions like depreciation and amortization.
However, there are some nuances to consider:
Economic Reality: In businesses where depreciation and amortization reflect real economic costs, such as the replacement of specialized equipment, there may be an argument for considering these deductions in child support calculations.
Tax Implications: Depreciation and amortization are part of the actual tax calculation. Ignoring these could result in an inaccurate representation of net spendable income.
Conclusion
While the Family Code and case law provide guidance, the treatment of amortization in child support calculations can still be complex. Each case may require a detailed analysis of the business's financial situation and the actual economic impact of these non-cash expenses.
For individuals dealing with these issues, consulting with a knowledgeable family law attorney is crucial to ensure that child support calculations are fair and accurate. If you have questions about how your business expenses might impact your child support obligations, consider seeking professional legal advice to navigate these complex financial considerations effectively.