Determining financial support in a divorce can be emotionally draining and overwhelming, but it does not have to be. Today, we talk about everything maintenance, to help listeners navigate the process and provide insight to ensure you get the best agreement possible. We have covered this topic before in Episode 77, but today we take a deep dive into net spendable income with financial expert Boris Sobolev.
Boris is a managing partner at Cornerstone CPA Group which provides personalized financial guidance to local individuals and businesses. Although his work focuses on business valuations, he is also involved with maintenance agreements for divorce proceedings and helps clients navigate difficult and complex financial analyses.
In this episode, we learn about net spendable income, the challenges of determining income, the similarity between business valuations and net spendable income, and why gross income is the basis for maintenence calculations. We also run through different scenarios with regards to tax, deductions, income from a business, and real estate when calculating net spendable income.
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Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, separation, and co-parenting in Colorado. Ryan and Amy are the founding partners of an innovative and ambitious law firm, Kalamaya | Goscha, that pushes the boundaries to discover new frontiers in family law, personal injury, and criminal defense in Colorado.
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Ryan Kalamaya (4s):
I'm Ryan Kalamaya
Amy Goscha (6s):
And I'm Amy goscha
Ryan Kalamaya (8s):
Welcome to the divorce at altitude, a podcast on Colorado family law.
Amy Goscha (13s):
The force is not easy. It really sucks. Trust me. I know besides being an experienced divorce attorney, I'm also a divorce client,
Ryan Kalamaya (21s):
Whether you are someone considering divorce or a fellow family law attorney listening for weekly tips and insight into topics related to divorce co-parenting and separation in Colorado. Welcome back to another episode of divorce altitude. This is Ryan <inaudible>. One of the things people ask me the most about in divorce is maintenance and it's an emotional issue for the recipient, but most importantly, for the pain war and in a previous episode, episode 77 with divorce attorney, Robin Batey, we talked about maintenance and it's been referenced on the show and in the absolute with Robin Batey, we talked about net spendable income.
Ryan Kalamaya (1m 4s):
And that is what we're going to focus on here today, because it is a different approach to the guidelines. And we're going to talk about that with a financial expert or Sobel who I have worked with before and Boyce, you know, for those that don't know you, can you give our listeners a little insight into who you are?
Boris Sobolev (1m 25s):
Hi Ryan, nice to join you. I've been in the field for 17, 18 years now, and I'm a managing partner of cornerstone CPA group. A lot of our services revolve around divorce. We do a lot of business evaluations. We do gross income determination and kind of a derivative of that. And that's spendable income. We do trust analysis. We do tracing forensic work, a lot of divorce related financial services. Also, we have a tax practice where we focus on small business owners, metal sized business owners, and help them with their tax reporting and financial planning needs.
Ryan Kalamaya (2m 5s):
Yeah. Before we get into the maintenance, you, and I'm talking before the shell, you we're recording this through kind of a video platform and we record our podcast, but we were talking about how, you know, you're based in Denver and you and I had a case where you drove up to Glenwood and really the, the expert community, especially financial experts. You know, you, you guys are really looking at doing appearances via video in this kind of new age. Zoom has really allowed you and mean and other financial experts to work together across the state of Colorado. And you got a microphone for this episode or a recording where you're talking about how it's probably going to be beneficial for you to testify in cases throughout the state.
Boris Sobolev (2m 52s):
Oh, it's been great. I mean, we've been testifying quite a bit remotely like this, and it also depends on the attorney or the attorney is very comfortable with this kind of a setup. It can be a great asset, great benefit, you know, a lower cost for the client, but sometimes, you know, some attorneys would like to be in person. And there's also some, you know, you can argue that's pretty important to have that face to face, but if you've got the good audio video and you're good at testifying remotely, it's, I think it's great. And I enjoyed
Ryan Kalamaya (3m 23s):
And deliberate what sit in on spousal maintenance and NetSpend the link I'm. So for listeners that don't know for us, you know, you go through a property division in a divorce, so you figure out which party is going to get what, and we've had various episodes talking about that, but then you get into maintenance or alimony. And as I mentioned in the beginning, it's an emotional issue, but a lot of people think that it's just a formula in Colorado. There is a guideline amount, but there are factors that the court has to consider. And, you know, most importantly, there's an income threshold. So when people are combined making $240,000, the guidelines don't apply.
Ryan Kalamaya (4m 8s):
I mean, you know, you and I have been in Northern cases where the judges they might extrapolate, and there's basically different ways that we can look at spousal maintenance. But one of the issues when you're looking at the factors is the incomes. And we'll talk about that, the needs of the recipient, but really then that's when the low income really kind of is involved with the factor. And that is the ability to pay. So for those that don't know what is net spendable income?
Boris Sobolev (4m 42s):
So let's spend the bull income in a divorce context is, is, is the amount available to a party after having paid required expenses, amount of income available, you first determined, gross income, and you might, you might be using the statute, Colorado statute, 14 dash 10 dash one 14, but that gives you gross level of income before you've paid taxes before you paid required expenses, such as maybe it's health insurance, maybe it's debt service, maybe there's minimum payments required on your credit cards, on your various loans.
Boris Sobolev (5m 23s):
There's a lot of things that come out of your gross income to get to sort of ease disposable spendable income. And that's, what's really available to the party involved. And that's important to look at it.
Ryan Kalamaya (5m 35s):
So you mentioned at the beginning, you talked about business valuations and, and you, you and I have worked on, you know, several business valuations together. How can you walk our listeners through for them that they don't understand business valuation? Why is there this kind of natural extension, if any, between NetSpend and rental income in a business valuation,
Boris Sobolev (5m 59s):
When we get involved in determining parties, income really is on cases where there's complexity. It's usually not someone who gets a W2 and you know, what the income is, and then you can calculate taxes pretty easily, it's you? It usually has to do with business owners, business owners have, you might have a closely held business where it's not very straightforward to determine how much income do they really have. Their income could fluctuate from year to year, certainly past couple of years with COVID that's been especially the case for most business owners. So income is not very easy to determine. We get brought in to determine what the value of a business would be for divorce purposes for a division of assets.
Boris Sobolev (6m 45s):
And so when we, when we go through the process of valuing a business, the key component to that process is determining income available to the owner from the business. That's what eventually drives value. That's what drives the value of the business. And that's what, when you've given, given that income and multiple, you give to a value of the business, as, as part of determining the value of the business, you've already done most of the work to get to a gross level of income to the business owners. At that point, you can take it further and start working to understand what the net spendable is.
Ryan Kalamaya (7m 25s):
And you know, when you are involved in these valuations and other episodes, we've talked about the difference between a joint expert and a retained expert with nuts, spendable income in your experience, Boris, how is it more likely that this is a joint engagement or some sort of retained engagement?
Boris Sobolev (7m 46s):
It's usually a, we're usually party experts retained by one side versus the other, but there's probably a quarter or a third of the cases where we're joined. Usually one side is trying to demonstrate something important that a, you know, that the client, the business owner may not have the income available to them to pay for certain obligations to pay for property division, alimony, child support. And so usually it's, it's an important analysis. And that spendable analysis is usually is used to really demonstrate an important point. And so may not necessarily be the best for joined retentions, but we certainly do those.
Boris Sobolev (8m 31s):
And sometimes both attorneys recognize that there's a lot of required expenses that need to be taken account into account taxes are a big deal. That payments are large. And so both attorneys may recognize that it's important for a joint neutral expert to look into that and give a realistic picture.
Ryan Kalamaya (8m 52s):
Yeah. And just for reminder of how income is viewed into divorce, really what we first do is look at what you described as gross income. And I can tell you Boris alive, my clients will come to me and say, well, I get X amount in deposit into my bank account, but really what we're trying to do in divorce is compare apples to apples. And so people may, you know, they, they may own a property and they can take depreciation and the it, which is a Phantom deduction. And that can really add her, which we can get into in that spendable income gross income is the starting point for determining child support and maintenance.
Ryan Kalamaya (9m 34s):
But it's not just, that's not the end of the story. And really the net spendable income is we're getting into taxes, we're getting into other things. So for those listening, we'll get to income and variability and, and, you know, explain that out, flush it, flush it out a little bit. But what are the general factors that really come into play when you're doing a NetSpend, the low income you've, you've mentioned a couple of taxes. What other things can come into play in a net spendable income analysis
Boris Sobolev (10m 6s):
On the expense side, and what's required to come out of, and that spendable I'd say there is no hard and fast rule as far as what has to come out. Typically are 99% of the time income taxes come out, peril taxes come out. Some other deductions on the pay stub of the business owner or an employee have to come out because those are typically not discretionary. Some deductions on a pay stub. For example, 401k contributions would be discretionary. They can be eliminated. Health insurance is a good one. Again, that's sometimes as paid by the employer sometimes as a self-employed individual would be paying it out of pocket.
Boris Sobolev (10m 49s):
And that can be argued that that's a, it's not disposable income insurance, health insurance house to be paid. It's even required by law,
Ryan Kalamaya (10m 58s):
Especially when, when kids, you know, when, when kids are involved in. So when we're looking at Eric Wolf, our hypothetical divorce client, if he is responsible for paying the kids, his health insurance, then that would be a factor that you would consider Boris in what Eric's net spendable income after the divorce. So his income, and then you look at his taxes and then what's he going to be paying for health insurance? You know, and then Melanie, she's gonna come off of her health and their health insurance. If they've got a family plan, but he's still responsible for paying the kid's insurance. And that's an obligation that he has to pay, right?
Boris Sobolev (11m 37s):
Absolutely right. Private school tuition. You know, I think Eric Wolf in your hypothetical example has kids in a private school. So that's not going to go anywhere. And debt, as we alluded to before is a big deal. You know, a lot of times we'll see parties have amount of credit card debt. And typically we will use the minimum debt payments as something that would come out of gross income to get to net spendable, what are they absolutely required to pay? They should be paying more than the minimum, but it is easy to defend that you should at least be paying minimum credit card payments. Sometimes there's private party loans.
Boris Sobolev (12m 18s):
The client might have purchased a business. We see this quite a bit and they still owe alone on the purchase price. And so they to, to continue to enjoy the benefits of the business or an asset they acquired, they have to continue to make payments on, on, on the loan. Now it gets more complicated, but certainly those loans have to be taken into account.
Ryan Kalamaya (12m 45s):
Let's talk about getting Tom. What happens if Eric Wolf, if he's a business owner, can you give us an idea that the listeners, an idea of different approaches to Eric as a business owner for income, because that's going to be one of the primary issues in a net spendable income analysis.
Boris Sobolev (13m 4s):
So yeah, Eric, he's a business owner and we get involved and we started collecting financial information for, for Eric's business. We look at the business tax returns, we look at financials, we can analyze expenses of the business revenue patterns of the business. And so businesses have volatility in their revenue stream and that's just the nature of any business. And so it gets complicated. It is difficult to determine sometimes what are you reasonable level of income is a lot of the times we will currently see that businesses were doing really well before COVID and then they were hit really hard for about a year.
Boris Sobolev (13m 50s):
And then things have really rebounded over the past 12 months, but is that sustainable? How sustainable is it going to go higher? So you as a business valuation expert or an income analysis expert, you're analyzing historical patterns and, and determining a reasonable level of income going forward. That's the key is look at the history to determine what the future likely will hold for income from this business.
Ryan Kalamaya (14m 20s):
Sarah scenario would be Eric Wolf, the businesses growing and consistently growing. So that would, militate in favor of you knew Boris is the financial expert saying I'm going to use like a three-year weighted average, where you take the most recent year and you place a particular weighting on that compared to a business where it's all over the place. And you might take a five year average. That's just straight across the board because that evens out that lumpiness. So, and, you know, Boris, you, you know, cause you, you live this and, and you know, I do too, but for the listeners, they can give us an example or, or like why that would matter for a particular scenario for Eric's income.
Boris Sobolev (15m 5s):
You know, I can give you maybe one example, you know, real estate has been very hot and, you know, you might be determining income for, for, for a brokerage business. And you could see that over the past three years, I've been, they've been doing phenomenally well, you, as an expert are likely predicting that this is not sustainable, that things are going to come calm down. You know, interest rates have risen, you know, purchases of homes gonna slow down homes are becoming less affordable. So you can see that this business is likely to slow down. So to look at the past three years, as a proxy for the future is very problematic for this business.
Boris Sobolev (15m 51s):
So in this example, we would probably look at the past five to 10 years, even up to 10 years to determine what has been the norm for this business on a longer term basis, to get to a more reasonable outcome for what the gross income for this business owner is.
Ryan Kalamaya (16m 10s):
Right. And, you know, really Eric's income under a three-year average could be for example, $200,000 per year when you're then starting your analysis for his income for net spendable income. But that can be, you know, in contrast to another different model of like a five to 10 year that could result in half that much a hundred thousand dollars. And so Eric's going to be incentivized to have the lowest amount Melanie's going to be incentivized to hire an expert and say it's as high as, as, as possible. And there's a battle over what Eric's income is.
Ryan Kalamaya (16m 51s):
And so for the listeners to kind of conceptualize, you know, what these net spendable income reports look like is you have various spreadsheets and scenarios where there's an income. And, you know, we just went over that income can be in dispute, you know, Boris, it's obviously going to depend on five-year or three-year and all that, what that goes in, but then you have the income and then you go through and you have various deductions and we'll go through some scenarios where those deductions then borrow as kind of subtractions or deductions on the spreadsheet. And then there's the an end number. So, you know what Eric makes per month, if he makes a hundred thousand or $120,000 a year is $10,000 a month.
Ryan Kalamaya (17m 38s):
And then you start looking at the various deductions in to see how much money he has at the end of the month will, you know, net to, if it's available to pay Melanie a particular amount of spousal support. And it really comes into play for maintenance. It does in parts come to play on child support, but you know, really the analysis is, and, you know, the first example that we, you know, thought about Boris was, you know, if Eric's a doctor and he's making $500,000 a year, he's making a healthy income, but he owes a $250,000 in student loans. He pays for his kids to go to Kent Denver and is keeping the marital house in cherry Creek, which has a large mortgage.
Ryan Kalamaya (18m 25s):
Right. You know, what are the things that are going to go into play in their net, spendable income in that analysis? Is it appropriate to really look at well, he makes $500,000 a year. That's the end of the story. He's got a lot of money.
Boris Sobolev (18m 37s):
Yeah. You've got, you know, Eric, you know, the first question is to ask us, you know, is he a, is he an employee or a business owner? You know, he's a business owner, there's all going to be a lot more analysis involved because that $500,000 is not guaranteed. But in this case, I think we'll assume Erica is a, is a, this is an employee and his wages are $500,000. And so that's easy, relatively easy to determine. So let's now look at taxes. He may be paying $5,000 every month in, in payroll tax deductions, most to go into, to income taxes. Now that doesn't mean that that's actually his income tax liability.
Boris Sobolev (19m 18s):
He's just making those payments as part of his W2. So an expert should go in and really determine on $500,000 of income, given his level of tax deductions, what is his real tax liability? And, and then incorporate the real tax liability into the net spendable analysis, because, you know, he may be over withholding. He may be under withholding for taxes. He may have a big refund next year or a big tax liability. So then you look at what are some of his required expenses, you know, paying for private tuition, maybe he's got student loan debts, or maybe he, he has a delinquent taxes that he hasn't paid.
Boris Sobolev (20m 8s):
You know, you can't just keep paying income taxes. So if you have a liability to the government that has to be taken account into account, and what's, you know, what's really available to him because he has to make minimum payments on his tax liability.
Ryan Kalamaya (20m 22s):
Right. And if he's got a mortgage, he's got to pay that mortgage, right? So there's any dispute about, for example, the mortgage amount in, but then there could be a dispute on whether or not he's with horror, bringing too much for taxes or he's making 401k contributions. Presumably if, if, if Melanie and Eric agreeing that the kid should go to Kent Denver, you know, that will be an agreement. There shouldn't be really any disagreement. There might be some financial aid involved, but I think that the important point for listeners is that the decisions that they make in a divorce can really matter for maintenance and that when you know, what available tools are out there with, you know, use of experts, then it's just helpful to just know and make decisions.
Ryan Kalamaya (21m 16s):
And so, you know, when you've got another example, Eric is a real estate broker in the mountains, and you referenced from real estate hot. And I narrow, you know, several of my real estate broker friends who are making an absolute killing, but, you know, they think that it's going to cool off and the things, you know, are, are going to be all over the place. So we're really going to be looking at his income. We kind of talked about this a little bit, but if there is in that scenario, real estate broker, and, you know, Eric agrees that meeting solution to pay Melanie a million dollars in the equalization payment for property. So he doesn't have a million dollars.
Ryan Kalamaya (21m 56s):
He agrees to pay her over time. And I had this case where we, I purposefully compressed or shortened the time period under which he had to make that million dollar payment. And so we weren't able to agree at mediation on the amount of support. So forest walk us through a NetSpend, the role income analysis, if we're going to trial on just support in the circumstance where he's a real estate broker, but he owes a million dollars in a net in a equalization payment with the net spendable income analysis.
Boris Sobolev (22m 33s):
Yeah. W w with a real estate broker, no one knows what a real estate broker is going to make next year. That business is so volatile and unpredictable. And so you use financial experts to, to present a case, to present an opinion, and maybe you're able to use a joint expert. That joint expert would probably have more credibility. So you have to, and in that case, I think use an expert to, to determine what that top line income is. What is a gross income is. And then for a self-employed real estate broker, you have to determine what are his business expenses.
Boris Sobolev (23m 17s):
We didn't touch on that very much, but is what he he's claiming on his income tax return, reasonable. You know, he might be claiming $50,000 of business miles when he can't possibly be traveling that much, or maybe he's claiming huge home office deductions and $20,000 of meals per year. And so that expenses need to be closely scrutinized owners are incentivized. Business owners are incentivized to, to over-report their business expenses to lower their tax burden. And that's just a natural. And so a lot of our work has to do with an analyzing business owner expenses.
Boris Sobolev (24m 3s):
And that feeds into what the business owners, real gross income is out of the business. And so let's say you now arrived at the reasonable gross income for Eric. Now, you know, he's got this significant obligation to pay his soon to be ex-wife an equalizing $500,000 payment. And so he might be paying $10,000 per month in property division over the next five years or so. And when you run through the math and you, you look at his gross incoming, you subtract all his required payments, perhaps there's child support and there's property division payments, there's taxes, there's insurance, there's private school, there's debt obligations.
Boris Sobolev (24m 53s):
You might arrive. You might determine that Eric has $2,000 to live on, and it's not nearly enough.
Ryan Kalamaya (25m 1s):
We're the disagreements are with experts. I mean, you, you, you mentioned earlier about, you know, expenses and travel and that's within a business. And that makes sense, but what, where else can we get into some squishiness with experts in what they can agree or disagree on with a net spendable income?
Boris Sobolev (25m 21s):
I think a big one is debt. So, you know, Eric might be obligated to make dead payments, but, and there's no dispute. There may be no dispute that he's obligated to make those payments, but should they come out of his net spendable? Because if part of his debt payments are his interest. And another part of it is principle. One expert could argue that the principal repayments are creating wealth for him. They're raising his net worth, they're reducing his debt. And therefore, even though he's spent that money, he's enriched himself.
Boris Sobolev (26m 3s):
So it shouldn't come out of his net spendable. So there's disagreement on that aisle. A lot of the times an expert could argue that, you know, you might have paid $2,000 to reduce your debt level, and you're required to do that, but you could go out and borrow that $2,000 from another source if you have the borrowing capacity. So that's a big one that I come across is there might be a lot of debt, but what is, how do you really treat it for an expendable? Right.
Ryan Kalamaya (26m 36s):
I think, I mean, I've seen arguments on tax rates, but, you know, then get into living expenses. I mean, Eric is he's entitled to his, his own expenses, right. But does that mean that you should have a thousand dollars a month in restaurants? Is that reasonable? I mean, and, and experts can disagree and it kind of depends on how much they're willing to go with that cookie jar to kind of have different deductions. And it depends on incentives. So let's try to turn it around and come up with a different scenario. So let's say, you know, we're helping out Melanie Wharf and Eric owns a bunch of real estate.
Ryan Kalamaya (27m 18s):
And then he's generating, you know, on his tax returns, he's generating very little money on the tax returns. You know, what are the things that you think would come up in a net spendable income analysis when you've got a reported low income from Eric, because he's a real estate real estate model goal that might be relevant for Melanie and saying, listen, he's got a lot more money to spend on. You know, supporting me in alimony then is what is apparent on the tax returns,
Boris Sobolev (27m 52s):
Real estate investors enjoy some, some very nice tax breaks. When you acquire a piece of rental real estate, you're able to depreciate that real estate over 27 or 39 years, that reduces your taxable income, but it doesn't reduce your actual income for gross income or net spendable income purposes. So when one looks at the tax returns of a real estate investor, a lot of the times income looks really low. And that's because there's a lot of depreciation being taken. Sometimes there's a lot of repairs being undertaken, which are really improvements and, and, and, and shouldn't be considered the reduction of income.
Boris Sobolev (28m 37s):
And so, and then I'll a lot of the times a real estate investors trying to not ever sell their real estate. And if they need to get out of a certain piece of real estate, they will try to exchange it, do a tax-free exchange into another piece of real estate. So they never really report any capital gain from selling real estate because they don't want to pay the tax. And it's perfectly legal and savvy investors will use tax-free exchanges a lot. And so then the question comes, comes in, as you know, how do you treat the appreciation of real estate over the long run?
Boris Sobolev (29m 20s):
How do you treat it? Is that income. If, if Eric is, is buying and selling and exchanging real estate all the time, and he may or may not be reporting capital gains on his tax returns, she do you consider an increase in the values of the properties or even tax-free exchanges as, as income to him. There's this, this becomes a common issue of contention among experts. And another factor is savvy real estate investors like, like Eric would instead of selling a property. And if they want some cash over the property, they will just simply refinance it, not a taxable event, but it provides a lot of cashflow or how do you treat that?
Ryan Kalamaya (30m 7s):
So there's the art loosening. It want to find out more for us, we'll have your website in the show notes, but where how's the best way to, for people to get in touch with you.
Boris Sobolev (30m 17s):
Yeah. You can go to our website, cornerstone cpa.com. We're based in Denver tech center and happy to chat with you if, if you haven't interested in our services.
Ryan Kalamaya (30m 28s):
Thanks again for joining us on divorce at altitude. If you listening, enjoyed this episode, please leave us a review. It does make a difference for those that find us. And more importantly, tell a friend about this podcast. If they are going through a divorce and want to find out more, we aim to provide cost-free information. And we do cover a variety of issues. Boris, you know, we got into NetSpend, the low income, but we talk about parenting issues and really kind of a wide array of apps out. So feel free to let people know. And until next time, thanks again for joining us on divorce, altitude, everyone. This is Ryan again.
Ryan Kalamaya (31m 8s):
Thank you for joining us on divorce at altitude. If you found our tips, insight or discussion, helpful, please tell a friend about this podcast for show notes, additional resources or links mentioned on today's episode. Visit firstname.lastname@example.org. Follow us on apple podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find me at <inaudible> dot LA or 9 7 3 1 5 2 3 6 5. That's K a L a M a Y a.law.