In litigating many dissolution cases, a material issue is often the determination of the real income of one or both of the parties to the case. The reason? The existence of perquisites and/or fringe benefits. It is common that a significant portion of the income generated from employment or by a self-employed business owner comes in the form of perquisites or “perks.”
In the case of employees, the perks are considered fringe benefits, which simply are additional compensation granted at the discretion of the employer. This includes such benefits as accrued sick pay, vacation pay, tuition reimbursement and employer-provided parking. Fringe benefits provided by employers are not considered a gift but are earned by the employee as part of their compensation for services rendered.
Self-employed business owners, on the other hand, control the amount and nature of their perquisites, usually as a result of writing off personal expenses as business expenses for tax purposes. Medical and automobile expenses are common expenses that often fall into the perquisite category.
The proper determination and analysis of perks can affect the property division if one or both of the parties owns a business (i.e. when a business valuation must be performed) and for gross cash flow available for support.
Some benefits have a significant economic value that should be added into the spouse’s income when valuing a business and for calculation of gross cash flow for support purposes. Others are less significant, but still should be considered to the extent that they reduce the spouses’ living expenses.
Benefits that directly reduce the parties’ living expenses should be considered as additional non-taxable income for purposes of calculating gross cash flow available for support. In the case of employees, this could include such benefits as expense accounts, mileage reimbursements (to the extent they exceed actual business automobile expenses), meals, day care, and the employer’s portion of pension or profit-sharing contributions.
One must determine which expenses are business and which are personal on an expense-by-expense basis. Reimbursement of expenses that are found to be personal in nature should be considered as possible add-backs to income.
Some expenses, such as medical reimbursements, are inherently personal. Other expenses may need to be allocated. For automobile expenses claimed, for example, it is important to ask such questions as, what is the distance between the party’s home and his or her place of employment? How many business meetings are attended in an average week, and what is the approximate mileage to get to and from those meetings? The goal of such questioning is to determine the actual business mileage incurred and deduct that from the total miles being claimed to determine the personal automobile mileage and therefore, the personal portion of the automobile expenses. (It should be noted that the travel between the home and the business is considered commuting mileage and is normally allocated as personal.)
Common perquisites include but are not limited to:
- Automobile expenses
- Education (non-professional)
- Charitable contributions
- Legal fees (personal/dissolution)
- Accounting fees (personal tax preparation fees)
- Life insurance
- Disability insurance
- Health insurance
- Medical reimbursements
- Pension or profit-sharing plan contributions