Opinion ID: 852430
Heading Depth: 2
Heading Rank: 2

Heading: Business Deductions and Gross Income

Text: Marla contends that the trial court erred by using the adjusted gross income figure from Timothy's tax returns without adding back any of the depreciation or other deductions taken for tax purposes as his income for calculating child support. Timothy argues that it was within the trial court's discretion to use this amount. Calculating gross income for the self-employed presents unique problems and calls for careful review of expenses. Child Supp. G. 3(A) cmt. 2(a). Guideline 3(A)(2) addresses the calculation of gross income for self-employed persons: Weekly Gross Income from self-employment [or] operation of a business . . . is defined as gross receipts minus ordinary and necessary expenses. In general, these types of income and expenses from self-employment or operation of a business should be carefully reviewed to restrict the deductions to reasonable out-of-pocket expenditures necessary to produce income. These expenditures may include a reasonable yearly deduction for necessary capital expenditures. Weekly gross income from self-employment may differ from a determination of business income for tax purposes. Child Supp. G. 3(A)(2). The commentary to guideline 3(A) further provides that [w]hile income tax returns may be helpful in arriving at weekly gross income for a self-employed person, the deductions allowed by the Guidelines may differ significantly from those allowed for tax purposes. Child Supp. G. 3(A) cmt. 2(a). Trial courts have discretion in determining which business expenses are deductible for calculating the child support obligation of self-employed persons, but the court must engage in a careful review of the facts and circumstances in making its determination. The adjusted gross income from a party's tax return is a useful point of reference, but the court must evaluate the deductions taken in arriving at that figure. In this case, using the adjusted gross income from Timothy's tax return for calculation of his child support obligation was error on multiple grounds. For example, Timothy's adjusted gross income figure includes a deduction of over $7,000 that Timothy invested in his retirement account. (App. at 239.) Contributions to retirement accounts are usually a wise move, but they certainly do not qualify as an ordinary and necessary business expense that should be deductible for determining child support. Moreover, the adjusted gross income figure from Timothy's tax returns also includes deductions of over $24,000 for redemption of Marla's interest in the partnership, which Marla received as part of the parties' property settlement. ( Id. at 152-53.) Parties are not permitted to deduct the amount their spouse received in the property settlement from their income for calculating child support. And further, in using the adjusted gross income figure from Timothy's tax return in calculating his child support, the court permitted the entirety of the depreciation Timothy deducted on his tax returns to be deducted from his income for child support purposes with no apparent consideration of whether the depreciation was appropriate or was overly accelerated for favorable tax treatment. We examined this phenomenon in Glass v. Oeder, 716 N.E.2d 413, 417 (Ind.1999), in which Justice Boehm wrote, In general, we would assume that allowable depreciation under methods designed to encourage investment may be overstated for child support purposes. Whereas the cost of capital can be an appropriate deduction, the trial court must carefully review these deductions to ensure they are reasonable out-of-pocket expenditures necessary to produce income. Child Supp. G. 3(A)(2). Accordingly, we remand this issue to the trial court for reconsideration as to which of Timothy's deductions were proper in calculating his income for child support purposes.