Is depreciation income?

It is not income, it is a legitimate business expense. But that is not the issue in your case. You are in a state court trying to determine the amount of child support. One of the factors that goes into the child support equation is income. Each state is free to set its own laws as to how income is to be calculated. It is not unusual for courts to modify tax statements to reflect income using a different criteria. Courts may look at your household income. This might also include tax-free income you received or deductions that might not be out-of-pocket expenses.

"Brian Simpson" wrote

Depreciation is a non-cash expense, so they add it back. Lenders do the same thing.

What they are trying to do, I suppose, is convert your tax return to a cash basis cash flow statement. What do you actually collect, and what do you actually spend. So pay attention to any non-cash income and/or non-cash expense.

BTW: Those both can work for you and against you. The depreciation add-back works against you - but - your loan payment (and not just the interest) should be deducted in any computation for how much cash you have available for child support.

On a personal note, you need to support your child. Whether you do that directly by buying things they want/need, or indirectly through child support payments to the other parent. Your attorney needs to work for you to make sure you have the ability ~to~ support your child by helping to protect your ability to generate the income to do so. Part of that, I would think, would to be sure you have the cash flow to meet your debt obligations on the rental building, both now and in the future, given the uncertain economic conditions.

One problem is, there is no accountability on the part of the judge to correctly understand tax laws, even of his or her own state.

For example, if you are paying child support and have remarried in a community property state, even if you file separately, you still need to include your share of community income on your separate return. I have heard anecdotally that a judge might be completely oblivious to this, or blatantly inconsistent.

To go one step further, and to try to educate myself on disclosure issues that I have no direct knowledge of, why is a tax return even used as a starting point for child support decisions? Can a parent be compelled to disclose tax return information in family court, as opposed to actual source documents such as bank statements and pay stubs?

-Mark Bole

Mark Bole asked:

Yes, a judge can. The tax return is used, as you say, as a starting point. Certainly depreciation, which is a non cash item, makes more cash available to pay support.

The real problem is that judges used last year's tax return without considering current year's projected income.

Happy New ChEAr$! Harlan p.s. at precisely midnight tonight, Mark, I shall pour me a neat dram of a whisky, to wit, Balvenie Doublewood! Talk about smooooooth! And I shall drink to the memory of all good times this past year, particularly friends on this and two other tax boards, some of which I had the pleasure of meeting in Baltimore.

For a moment there, I thought you might just be celebrating the leap second that was added this year (due to ongoing slowdown of earth's rotation), but that's about eight or nine time zones ahead of me, so it's already happened...

...anyway, I like your toast better! Unlike you, I haven't yet had the pleasure of meeting other contributors or moderators in person but I think there must be a good reason why this discussion group is low on stress and high on collegiality.

-Mark Bole

Depreciation is a return of capital by recognition of loss of capital investment. It is, therefore, an ordinary and necessary deduction from revenue in the calculation of income.

The operative words are "an ordinary and necessary deduction from revenue".

Keep in mind that attornies are professional obfuscators.

Dick