Will she get it even if my business & myself sink?

[mistoffolees]

My attorney is reputable, but seems to be carrying a "that's the way it is" attitude...because the woman is so favored. So I'm seeking second opinions or hopefully someone who has been through a similar situation who can give some insight. Isn't that the point of seeking advice from message board strangers, Zigner?

And I understand "being fair to the woman", but would the court really be so "fair" to the point that, I can barely support myself but that my soon to be ex will be living a financially worry-free life? Would the court really have no sense of reason about that?

Don't listen to Bali. The system is not that biased by gender.

You may or may not be obligated to pay alimony but it will be based on state guidelines, not any inherent bias.

If you don't think your attorney is working on your behalf, you're free to get another one.

However, I would suggest that you get with your accountant. If you're taking income and putting it back into the business, you're probably overpaying taxes. Depending on the business structure, it might be wiser to simply reinvest the money into the business rather than taking it as income.

And stop getting worked up about ex's unreasonable demands. My ex demanded about 130% of my annual income. She didn't get it either. Heck, depending on how long you've been married, your ex might not get alimony at all.

 

[LdiJ]

Don't listen to Bali. The system is not that biased by gender.

You may or may not be obligated to pay alimony but it will be based on state guidelines, not any inherent bias.

If you don't think your attorney is working on your behalf, you're free to get another one.

However, I would suggest that you get with your accountant. If you're taking income and putting it back into the business, you're probably overpaying taxes. Depending on the business structure, it might be wiser to simply reinvest the money into the business rather than taking it as income.

And stop getting worked up about ex's unreasonable demands. My ex demanded about 130% of my annual income. She didn't get it either. Heck, depending on how long you've been married, your ex might not get alimony at all.

If he has an LLC or an S-corp, then all the profit is going to flow through to his personal return anyway, and if he chooses to run most or all of the profits through payroll, there is nothing fraudulent with that. There is also nothing fraudulent with turning around and reinvesting half of it to help the business grow.

If he is a sole proprietor, again, its the same thing.

However yes, he should talk to tax professional because he make be structuring some things where he is paying more medicare taxes than he needs to pay, but that is going to be a moot point in a couple of years anyway. However it won't be dramatic. If he has enough income, after expenses to actually pay himself somewhere in the neighborhood of 220k, then he is definitely doing something right in reinvesting heavily in the business.

 

[DespMan_KC]

Don't listen to Bali. The system is not that biased by gender.

You may or may not be obligated to pay alimony but it will be based on state guidelines, not any inherent bias.

If you don't think your attorney is working on your behalf, you're free to get another one.

However, I would suggest that you get with your accountant. If you're taking income and putting it back into the business, you're probably overpaying taxes. Depending on the business structure, it might be wiser to simply reinvest the money into the business rather than taking it as income.

And stop getting worked up about ex's unreasonable demands. My ex demanded about 130% of my annual income. She didn't get it either. Heck, depending on how long you've been married, your ex might not get alimony at all.

Thanks you all for everyone's pov's and input. I appreciate it!

If this goes to court my accountant is my key witness...her's is the business evaluator.


Mistoffolees...we've been married 14 yrs and she already is getting alimony for 5-7 yrs....this 100k per year is in addition to that, (it's supposed to be her getting a share of my share of the business, which I actually co-own, 50/50). But that money isn't even there for the taking in the business right now, as it's not doing as well and I'm losing money anyways from reinvesting it. Hope I have your luck with the end result.

 

[mistoffolees]

If he has an LLC or an S-corp, then all the profit is going to flow through to his personal return anyway, and if he chooses to run most or all of the profits through payroll, there is nothing fraudulent with that. There is also nothing fraudulent with turning around and reinvesting half of it to help the business grow.

If he is a sole proprietor, again, its the same thing..

Nope. He says he's putting all the money back into the business. It depends on what he's doing with the money, but if it's truly being invested into the business, chances are that taking the money as a bonus and then reinvesting is a mistake.

Let's say he has $200,000 in business income (before his salary) and takes $100 K as salary and the rest as bonus (and ignoring payroll taxes for simplicity).

A. He then uses all the bonus money to buy equipment or inventory for the business. He would pay taxes on $200,000, but he'd only have $100 K minus $200 K worth of taxes left over. His basis in the business would have gone up by $100 K.

OR:

B. If, OTOH, he purchased the equipment or inventory via the business, then it would be a business expense and, in this case, he would have $100 K in income, but would only pay $100 K worth of taxes. His basis would be unchanged since he wouldn't be investing any of his own money into the business - just reinvesting the businesses money.

Now, he would pay more capital gains taxes when he sells the business if he uses option B. OTOH, he's paying a relatively high tax rate in Option A (plus, it may put him into Alternative Minimum Tax), so the income tax is probably greater than the capital gains tax that he will eventually pay (plus, of course, the capital gains taxes will be well into the future in all likelihood- and if he doesn't sell the business, he'll never have to pay them). While it's possible that there is SOME scenario where option A results in lower taxes, I can't think of any. Option B is almost always going to result in a lower net tax burden.

 

[OHRoadwarrior]

He should not be taking the money and reinvesting it. He should leave it in the business and eliminate bonus payments unless the company meets certain goals and can afford a bonus. His salary should be structured the same, if relevant.

 

[LdiJ]

Nope. He says he's putting all the money back into the business. It depends on what he's doing with the money, but if it's truly being invested into the business, chances are that taking the money as a bonus and then reinvesting is a mistake.

Let's say he has $200,000 in business income (before his salary) and takes $100 K as salary and the rest as bonus (and ignoring payroll taxes for simplicity).

A. He then uses all the bonus money to buy equipment or inventory for the business. He would pay taxes on $200,000, but he'd only have $100 K minus $200 K worth of taxes left over. His basis in the business would have gone up by $100 K.

OR:

B. If, OTOH, he purchased the equipment or inventory via the business, then it would be a business expense and, in this case, he would have $100 K in income, but would only pay $100 K worth of taxes. His basis would be unchanged since he wouldn't be investing any of his own money into the business - just reinvesting the businesses money.

Now, he would pay more capital gains taxes when he sells the business if he uses option B. OTOH, he's paying a relatively high tax rate in Option A (plus, it may put him into Alternative Minimum Tax), so the income tax is probably greater than the capital gains tax that he will eventually pay (plus, of course, the capital gains taxes will be well into the future in all likelihood- and if he doesn't sell the business, he'll never have to pay them). While it's possible that there is SOME scenario where option A results in lower taxes, I can't think of any. Option B is almost always going to result in a lower net tax burden.

I somewhat agree with your analysis, assuming that the reinvestment actually is being used for the purchase of equipment, and not simply to maintain cash flow during slower periods of the year, and assuming he can 179 expense the equipment. If its simply being used to maintain cash flow, then unless he is a C-corp he is going to be paying taxes on it anyway. He would save some medicare taxes if he is an S-corp, but not if he is an LLC.

If he is purchasing equipment he must depreciate, then he will be paying taxes on part of it anyway, as well.

Of course, if he is a C-corp then the C-corp would be paying taxes on any of the retaining earnings of the C-corp.

Also, it appears that the 100k a year that she wants is NOT alimony as he originally indicated, but what she wants as her buyout of her marital share of the business. That has nothing to do at all with his income, and everything to do with the FMV, and which is a completely different discuss than the one that we have been having.

OP, you stated that you owned the business 50/50. Is that correct? Is she the other co-owner?

If that is the case, then I would recommend that you drop yourself to just your $110k salary, and distribute the profits of the business (over and above your salary) 50/50 between you and your stbx. There is no reason why she cannot remain an owner of the business and take both the risks and benefits of ownership.

If that simply will not work, then you need to figure out a valid FMV for the business and work out what her share of that FMV would be, and then work on a reasonable installment plan to buy her out. I would actually recommend that the company buy her out, rather than you personally, if you will be the sole owner afterwards.

 

[mistoffolees]

I somewhat agree with your analysis, assuming that the reinvestment actually is being used for the purchase of equipment, and not simply to maintain cash flow during slower periods of the year, and assuming he can 179 expense the equipment. If its simply being used to maintain cash flow, then unless he is a C-corp he is going to be paying taxes on it anyway. He would save some medicare taxes if he is an S-corp, but not if he is an LLC.

That is not true.
First, it doesn't matter if he expenses the equipment or accelerates depreciation or depreciates normally. Capital gains taxes are still lower than income taxes.

Furthermore, it doesn't matter if he's using it to maintain cash flow in the business. If you're using it to maintain cash flow, then you are buying something with the money. Office supplies, salaries, equipment, inventory, etc. It doesn't matter WHAT you are spending the money on. If the business is spending the money, it reduces income and therefore income taxes. If the money is distributed to the owner and then reinvested it, then the owner has to pay more taxes.

The only way your analysis makes sense is if the business is generating cash and then keeps the cash in the business. But since OP says he is reinvesting his bonuses back into the business, that isn't likely.

If he is purchasing equipment he must depreciate, then he will be paying taxes on part of it anyway, as well.

Not necessarily, but even so, it's still going to be less tax than the way he is doing it.

Of course, if he is a C-corp then the C-corp would be paying taxes on any of the retaining earnings of the C-corp.

And you're missing the entire point. OP is taking bonuses out and then reinvesting them into the business. So clearly, the business needs some money. Even if it's a C-corp, if they do it my way (using business money to buy things rather than distributing it and then reinvesting), it would reduce the retained earnings - and therefore the taxes.

Also, it appears that the 100k a year that she wants is NOT alimony as he originally indicated, but what she wants as her buyout of her marital share of the business. That has nothing to do at all with his income, and everything to do with the FMV, and which is a completely different discuss than the one that we have been having.

OP, you stated that you owned the business 50/50. Is that correct? Is she the other co-owner?

I don't see anything in the post that indicates that to be true, but it's entirely possible. In fact, OP says "I own a business" not "We own a business". But if it's true, then SHE should also be getting the bonuses at year-end in most cases (although there are ways around it).

If that is the case, then I would recommend that you drop yourself to just your $110k salary, and distribute the profits of the business (over and above your salary) 50/50 between you and your stbx. There is no reason why she cannot remain an owner of the business and take both the risks and benefits of ownership.

I would strongly advise against this. A divorced couple owning a business is a recipe for disaster. It is far too easy to manipulate small business profits, so you could spend the rest of your life and all of your earnings fighting her over what is a 'fair' distribution of profits.

If that simply will not work, then you need to figure out a valid FMV for the business and work out what her share of that FMV would be, and then work on a reasonable installment plan to buy her out. I would actually recommend that the company buy her out, rather than you personally, if you will be the sole owner afterwards.

That's probably true, but again, I don't see anything that says that she owns part of the business.

 

[Bali Hai]

Don't listen to Bali. The system is not that biased by gender.

Excellent quantitive observation.

 

[Bali Hai]

My attorney is reputable, but seems to be carrying a "that's the way it is" attitude...because the woman is so favored. So I'm seeking second opinions or hopefully someone who has been through a similar situation who can give some insight. Isn't that the point of seeking advice from message board strangers, Zigner?

And I understand "being fair to the woman", but would the court really be so "fair" to the point that, I can barely support myself but that my soon to be ex will be living a financially worry-free life? Would the court really have no sense of reason about that?

Now you're catching on Bro!

 

[LdiJ]

That is not true.
First, it doesn't matter if he expenses the equipment or accelerates depreciation or depreciates normally. Capital gains taxes are still lower than income taxes.

Furthermore, it doesn't matter if he's using it to maintain cash flow in the business. If you're using it to maintain cash flow, then you are buying something with the money. Office supplies, salaries, equipment, inventory, etc. It doesn't matter WHAT you are spending the money on. If the business is spending the money, it reduces income and therefore income taxes. If the money is distributed to the owner and then reinvested it, then the owner has to pay more taxes.

The only way your analysis makes sense is if the business is generating cash and then keeps the cash in the business. But since OP says he is reinvesting his bonuses back into the business, that isn't likely.



Not necessarily, but even so, it's still going to be less tax than the way he is doing it.



And you're missing the entire point. OP is taking bonuses out and then reinvesting them into the business. So clearly, the business needs some money. Even if it's a C-corp, if they do it my way (using business money to buy things rather than distributing it and then reinvesting), it would reduce the retained earnings - and therefore the taxes.



I don't see anything in the post that indicates that to be true, but it's entirely possible. In fact, OP says "I own a business" not "We own a business". But if it's true, then SHE should also be getting the bonuses at year-end in most cases (although there are ways around it).



I would strongly advise against this. A divorced couple owning a business is a recipe for disaster. It is far too easy to manipulate small business profits, so you could spend the rest of your life and all of your earnings fighting her over what is a 'fair' distribution of profits.



That's probably true, but again, I don't see anything that says that she owns part of the business.

Lets try this again.

Example:

You have a company with 200k in profits, after expenses. The owner takes 100k in salary, and leaves 100k in the company (retained earnings).

If its a multiple member LLC (partnership or S-corp) or a partnership, or an S-corp then the owner pays 100ks worth of income, SS and medicare taxes on the salary, and 100ks worth of income taxes on the remaining profits (also medicare if its a partnership).

If its a C-corp, he pays 100ks worth of taxes on the salary, and the corporation pays 100k of income tax on the retained earning. However, the corporation might have a lower tax rate than the TP, or might not.

However, the availability of these profits are not determined until tax time, so he cannot go back and undo his profits for the previous year.

If instead of allowing that profit to happen at all, and during the course of that same tax year he spends 100k on equipment, he may be eligible to 179 expense that equipment (assuming that he qualifies). Ok...that works in your analysis, he does not have to pay any income tax on that profit. However, if he cannot 179 expense it he must depreciate it, which means he will only be able to expense the depreciation. For example purposes lets say that the depreciation is 20%. Therefore either he or the company will still be paying income tax on 80k.

 

[mistoffolees]

Lets try this again.

Example:

You have a company with 200k in profits, after expenses. The owner takes 100k in salary, and leaves 100k in the company (retained earnings).

If its a multiple member LLC (partnership or S-corp) or a partnership, or an S-corp then the owner pays 100ks worth of income, SS and medicare taxes on the salary, and 100ks worth of income taxes on the remaining profits (also medicare if its a partnership).

If its a C-corp, he pays 100ks worth of taxes on the salary, and the corporation pays 100k of income tax on the retained earning. However, the corporation might have a lower tax rate than the TP, or might not.

None of which is relevant. Since he's investing the money back in the business, he is almost certainly buying things that would reduce the income if he does it the way I'm recommending.

However, the availability of these profits are not determined until tax time, so he cannot go back and undo his profits for the previous year.

I didn't say that he could (although it MIGHT be possible in some circumstances). I'm mainly talking about changing the way he does things going forward.

If instead of allowing that profit to happen at all, and during the course of that same tax year he spends 100k on equipment, he may be eligible to 179 expense that equipment (assuming that he qualifies). Ok...that works in your analysis, he does not have to pay any income tax on that profit. However, if he cannot 179 expense it he must depreciate it, which means he will only be able to expense the depreciation. For example purposes lets say that the depreciation is 20%. Therefore either he or the company will still be paying income tax on 80k.

Even in your worst case scenario, he STILL saves money by doing it my way. More importantly, your estimate is worst case. There is also the possibility that:
- He can 179 expense the full amount - which means he doesn't pay taxes on it.
- Some of the item purchased (office supplies, inventory, etc) may be expensed as normal business purchase rather than as capital equipment. He could then expense the full amount.
- Even if we accept your figures and he only depreciates $20 K this year, he also gets a $20 K deduction next year and so on. So he still gets the $100 K deduction, it's just spread out over 5 years. (Furthermore, if he is doing the same thing every year, he'd depreciate $40 K next year, $60 K the year after that, and so on. If enough time elapses, he'd recover the full amount that he reinvested)

Since he didn't tell us what he did with the money after reinvesting it, so we don't know for sure, but we do know that by doing it my way, he would reduce his taxable income by $100 K ($100 K the first year if he's buying office supplies, inventory, or normal business services - or $100 K over 5 years if he's buying capital equipment that can't be expensed under 179). Since there's no downside (other than a POTENTIAL increase in capital gains taxes if and when he sells - that will always be less than the savings on income taxes), then he should be doing it my way. There is no scenario where he's worse of and he is better off in every scenario - by either a modest amount or a large amount.

 

[LdiJ]

None of which is relevant. Since he's investing the money back in the business, he is almost certainly buying things that would reduce the income if he does it the way I'm recommending.



I didn't say that he could (although it MIGHT be possible in some circumstances). I'm mainly talking about changing the way he does things going forward.



Even in your worst case scenario, he STILL saves money by doing it my way. More importantly, your estimate is worst case. There is also the possibility that:
- He can 179 expense the full amount - which means he doesn't pay taxes on it.
- Some of the item purchased (office supplies, inventory, etc) may be expensed as normal business purchase rather than as capital equipment. He could then expense the full amount.
- Even if we accept your figures and he only depreciates $20 K this year, he also gets a $20 K deduction next year and so on. So he still gets the $100 K deduction, it's just spread out over 5 years. (Furthermore, if he is doing the same thing every year, he'd depreciate $40 K next year, $60 K the year after that, and so on. If enough time elapses, he'd recover the full amount that he reinvested)

Since he didn't tell us what he did with the money after reinvesting it, so we don't know for sure, but we do know that by doing it my way, he would reduce his taxable income by $100 K ($100 K the first year if he's buying office supplies, inventory, or normal business services - or $100 K over 5 years if he's buying capital equipment that can't be expensed under 179). Since there's no downside (other than a POTENTIAL increase in capital gains taxes if and when he sells - that will always be less than the savings on income taxes), then he should be doing it my way. There is no scenario where he's worse of and he is better off in every scenario - by either a modest amount or a large amount.

Inventory cannot be expensed until it is sold. I was also talking about cash flow. Cash flow is different than expenses. A company's yearly expenses are going to be whatever they are going to be. However, that doesn't mean that a company does not have cash flow shortages during slower times of the year.

Nor does it mean that a company should spend money indiscriminately just to be able to expense it away.

 

[mistoffolees]

Inventory cannot be expensed until it is sold.

Like many things, that's not always true.

We don't know OP's business. If they're on a project business and use percent completion accounting, they can absolutely expense inventory purchases (technically, they're not expensing the inventory, but buying inventory moves the project further toward completion which means that their COGS goes up. In some cases, COGS goes up by even more than the amount of the inventory purchase). So buying inventory most certainly CAN reduce income.

Furthermore, that was only one of the options I cited.

I was also talking about cash flow. Cash flow is different than expenses. A company's yearly expenses are going to be whatever they are going to be. However, that doesn't mean that a company does not have cash flow shortages during slower times of the year.

Which is irrelevant. He's taking the money as a bonus AT THE END OF THE YEAR and then reinvesting it. There's absolutely no advantage to that. EVEN IN THE WORST CASE SCENARIO (let's say that it was an LLC and he's reinvesting the money just to meet payroll) taking the money as a bonus costs him. If he leaves the money in the business, he doesn't have to pay social security or medicare taxes. By taking it out, he does.

But, as I've shown, in most cases, the advantage is much greater than that - especially if he's investing in capital.

Nor does it mean that a company should spend money indiscriminately just to be able to expense it away.

And no one ever suggested that they should. OP said that he's putting his excess earnings back into the company already. I'm simply suggesting a way that he can do that with less tax consequences.

 

[DespMan_KC]

She is not the co-owner.....she's asking for half of my half of the business, because she believes she's entitled to it. But she does not care that the business will sink if she gets that.

 

[mistoffolees]

She is not the co-owner.....she's asking for half of my half of the business, because she believes she's entitled to it. But she does not care that the business will sink if she gets that.

Whether she is entitled to 1/2 (or any portion) of the business depends on several factors:

1. When did you start the business?
2. When did you get married?
3. Were marital funds used to finance the business - either at the start or later?
4. What type of business is it? In particular, would the business be of value to anyone else besides you or is its value solely dependent on you personally?


(That brings up another reason why you'd be better of simply keeping money in the business rather than taking it out as a bonus and reinvesting. As soon as you take the money out, it could arguably become marital and by reinvesting it in the business, you may have created some marital equity. If you had the business before you were married and if you had kept the business finances completely separate from marital finances - and only taken out your salary, it would be easier to argue that there was no marital component.