Child Support and K-1 Income

Determining the net income of a business owner or a shareholder in a closely-held business presents certain challenges when it comes to calculating child support. These individuals receive a K-1 distribution and there are various allowances permitted as a deduction on a corporate, partnership, or limited liability company tax return. However, under Illinois law, when it comes to determining net income “for child support purposes,” many of those deductions may not be allowed under Section 505 of the Illinois Marriage and Dissolution of Marriage Act, the law that governs child support.

One common example is the deduction a business owner may take for motor vehicle expenses. The vehicle may be used for transportation to and from work. Nonetheless, should the business owner be able to deduct this expense for the purpose of determining net income for child support? Depending on what side of the argument you are on, your answer may differ.

As a rule, in a case involving K-1 income, we always examine motor vehicle deductions on the partnership returns and the corporate business returns. It is most likely that those expenses will be added back into the net income for child support purposes.

For instance, in the case of IRMO Carpel, 232 Ill. App. 3d 806, 597 N.E. 2d 847 (1991), a non-custodial parent argued that if certain expenses are allowable as deductions under the Internal Revenue Code then they should be allowable as the proper determination of how to get from gross income to net income for purposes of child support. The Appellate Court in Carpel disagreed and reasoned that it is well-settled that tax reported income does not provide conclusive evidence of either the supporting parent’s gross or net income under the Illinois Marriage and Dissolution of Marriage Act.

In short, Section 505  provides its own guidelines on deductions on how to calculate net income. The deductions in the Illinois Marriage and Dissolution of Marriage Act under Section 505(a), reflect different policies and purposes than the Federal Tax Code.

Similarly, entertainment expenses may be treated like motor vehicle expenses when it comes to determining net income for child support purposes. Cell phones, gifts, and any number of “business expenses” will be subject to scrutiny. Ensuring that your lawyer is conversant in these matters and the various arguments can make a tremendous difference where K-1 income is involved.

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