An important issue for any Income For Support (“IFS”) report is identifying personal items that are included in the expenses of a business. While it is extremely common for business owners to deduct personal items in their expenses, it can be challenging to correctly identify them. Challenges may include, but are not limited to, poor bookkeeping records, “forgetfulness”, deliberate attempts by the business owner to hide them, etc.
At a minimum, an IFS report should include a review of the expenses and questions regarding the nature of certain expenses. Some expenses that commonly include personal items include:
- Advertising and promotion
- Meals and entertainment
- Office
- Travel
- Telephone (i.e. cell phones)
- Vehicle/automobile (including insurance, gas, and maintenance)
- Professional fees
- Maintenance and repairs
- Life insurance policy premiums
- Rent/occupancy/home office
It may be helpful to enquire about significant fluctuations of expenses to confirm whether there are reasonable business reasons for the fluctuations or if it may relate to a personal expense, such as a bathroom renovation or matrimonial legal expenses. In many instances a detailed review of the general ledger entries is required in order to identify questionable items. In some cases, a forensic audit may be required.
While it is the business owner who will have the details required to properly assess/consider the expenses, the non-business owner spouse may be of assistance. He/she may be able to identify personal items based on their knowledge of their (former) spouse’s habits, milestone events (i.e. birthdays, anniversaries, graduations), vacations, home renovations, etc.
Some specific items to consider include:
- Timing and nature of purchases. For example, are there purchases around Christmas that don’t seem consistent with business and/or purchases in other months?
- Family cell phone plans. Who is included, and what portion of their cell phone use is related to the business, if any?
- Many people will sponsor their children’s sports teams. Are these really for business purposes?
- Amazon purchases. These purchases may be business-related or personal in nature; some more in-depth questions and/or investigation may be required.
- Consider normal business practices. What is the timing of the meals? Is it normal to meet with a client on the weekend? Do they align with birthdays or other personal events?
- Subscriptions such as Netflix and Sirius.
- Flights/travel. Consider normal business practices. Is it necessary to travel for business? Does a trip include a personal component (i.e., attending a conference and staying a few extra days)?
- Maintenance and repairs. What work was done? Were any personal projects completed in that time period (i.e. renovation, deck, pool, landscaping)? Does the expense seem reasonable for the business?
- Vehicle expenses – What percentage of vehicle expenses are related to the business? Was a travel log maintained?
may be a complex process. The CBVs at
SB Partners can help!
