For purposes of determining child support, section 505(a)(3) of the Illinois Marriage and Dissolution of Marriage Act ("IMDMA") 750 ILCS 5/505 defines "net income" as the total of all income from all sources, minus certain deductions indicated in subsections (a) through (h) including, but not limited to, income taxes, dependent health insurance premiums, and prior support obligations. Not clearly defined in any subsection of section 505(a)(3), however, is whether business expenses or depreciation should be permitted deductions in determining net income.
Subsection (h) of section 505(a)(3) however, provides a deduction from net income for "Expenditures for repayment of debts that represent reasonable and necessary expenses for the production of income..." Nowhere else in section 505, is the issue directly or indirectly addressed as to whether business expenses or depreciation are permitted deductions. For the reasons stated herein, where a fair and objective basis for the deduction of said expenses can be established, their deduction from net income should be permitted and subsection (a)(3)(h) should be accordingly revised in order to redress the current conflicting Illinois Appellate decisions discussed below.
The First District, in Rimkus v. Rimkus,199 Ill.App.3d 903 permitted the husband, a commissioned salesman, to deduct from gross income $6,696.00 of business expenses (not reimbursed by the employer and not specified in the opinion) reflected in his IRS 1040, Schedule C, to determine net income for child support purposes. In quoting section 505(a)(3)(h), which allows a deduction for "[e]xpenditures for repayment of debts that represent reasonable and necessary expenses for the production of income..." (emphasis added), the first district essentially did a cut-and-paste job of this statutory section by obviating the "for repayment of debts" clause from its analysis and stated as follows: "We find that Section 505(a)(3)(h) allows the deduction of nonreimbursed business expenses which are ‘reasonable and necessary for the production of income’ to determine net income." Id. at 145 Ill.Dec. 873.
In a conflicting decision, the Fourth District, in Gay v. Dunlap, 279 Ill.App.3d 140 denied deduction for certain car and entertainment expenses specifying that "We decline to follow Rimkus with respect to this point". Stating that it would be contrary to the principles of statutory construction to ignore the statutory clause "for repayment of debts", the Gay court would not "read this language out" of the statute and refused to permit an obligor’s deduction for said business expenses in determining net income for child support purposes.
Perhaps even more controversial than the above expenses, is the issue of the deduction of depreciation. To date, two appellate court cases have held that depreciation expense may be deducted from net income under section 505(a)(3)(h) in determining a child support obligor’s level of support if the expense is reasonable and necessary for the production of income. See Posey v. Tate 275 Ill.App.3d 822 (straight line depreciation allowed relative to rental properties) and Irmo Davis 287 Ill.App.3d 846 (straight line depreciation allowed relative to dental practice and building). [Practitioners in the remaining appellate districts where Posey and Davis are not controlling may advance the Gay holding to argue that section 505(a)(3)(h) does not permit a depreciation deduction because such business expenses are not expenditures "for repayment of debts."]
The above depreciation dichotomy was recently discussed but not decided by Supreme Court Justice Miller in Minear 181 Ill.2d 552. In Minear, the Court noted that the record contained no testimony or documents to explain the "basis" for the depreciation expense. Therefore, Justice Miller stated "Without deciding whether a depreciation expense may in all cases be excluded from consideration in determining an individual’s available income, we find that Respondent has failed to present evidence that would...warrant exclusion of that expense."
Reading Minear, it certainly appears the Illinois Supreme Court left open the door to deduct depreciation expense if a proper "basis" is established. The real question is whether it is ever fair to deduct business expenses or depreciation from net income. In appropriate circumstances, and as illustrated below in the Pizza Delivery Girl example, the answer should be in the affirmative.
Assume Mr. V’s Pizzeria pays Tammy Ling, a pizza delivery person, $20,000.00 as her take-home pay, but Tammy must use her own car for deliveries, the true business expense/use portion of which is $5,000.00 to her. Should not her determined net income be $15,000.00 for child support purposes? Financially speaking, should she not pay the same child support assuming she receives only $15,000.00 as her take-home pay but is supplied a car by Mr. V only for her deliveries? Yes! Tammy should pay the same child support whether she receives $20,000.00 but has to use her own car at a cost of $5,000.00 or she receives $15,000.00 but has no car expense because the car is furnished.
Expanding on this example, assuming that Mr. V is a Schedule C sole proprietor and child support obligor, he should be able to deduct business expenses related to the car for interest he pays on his delivery car loan, car repairs and depreciation for the car, since the car will eventually need to be replaced. [Note, deducting for both interest and depreciation is not "double counting" the deductions either, since no deduction would be allowed for the principal repayment portion of the car loan.]
One can understand why the legislature and the courts may be apprehensive about a blanket deduction for all depreciation expenses. However, depreciation should be a permitted deduction when a rational basis for the deduction is established. For example, depreciation of a building, while allowed for tax purposes, may not be a rational deduction for child support purposes where the building is actually appreciating in value. Similarly, depreciation of certain durable furniture or heavy equipment that will last decades in the obligor’s business may not be a rational deduction. Conversely, within a handful of years a car may need to be replaced and a computer may become obsolete, each therefore providing a rational basis for a depreciation deduction. To be fair, a case-by-case analysis is appropriate. To accomplish this, however, section 505(a)(3)(h) must be revised by the Illinois General Assembly.
Therefore, below the author proposes certain revisions to section 505(a)(3)(h) to, in the determination of "net income" for purposes of child support, deduct the following:
(h) Expenditures for repayment of debts that represent and other reasonable and necessary expenses for the production of income, excluding depreciation, unless the expenditure for the underlying asset is reasonable and necessary for the production of income and allowance of the deduction, in whole or in part, is reasonable and necessary to determine the obligor’s fair earnings in a going concern; medical...."
The foregoing revisions hopefully provide a common-sense approach to determine the fair net income of an obligor and should empower our judges with line-item veto authority as to certain challenged business expenses.
Vincent C. Ruggiero is the Principal of Vincent C. Ruggiero & Associates, P.C., Clarendon Hills. He is also a C.P.A. His practice is concentrated in Family Law. He received his Undergraduate Degree in 1981 from the University of Illinois and his Law Degree in 1984 from I.I.T./Chicago-Kent.