Child support calculation in Tennessee is performed according to the Tennessee Child Support Guidelines. They are found in Tennessee’s administrative regulations, at Tennessee Administrative Code part 1240-2-4. Tennessee uses a dual-income approach which figures the income for both of a child’s parents into the calculation of child support. Calculating the gross amount of income as required by the Child Support Guidelines is easy for a parent whose income is paid as wages or salary by a third-party employer. It simply requires determining the gross income from the parent’s W-2 and dividing it by twelve months to determine average monthly gross income.
For a parent whose income comes from self-employment, however, calculating the appropriate gross income can be more complicated. Many parents think that the net Schedule C income reported on the first page of an income tax return is the amount that should be used to make this calculation. Unfortunately, perhaps, that could not be farther from the truth.
According to the Guidelines, “Income from self employment includes income from, but not limited to, business operations, work as an independent contractor or consultant, sales of goods or services, and rental properties, etc., less ordinary and reasonable expenses necessary to produce such income.” It is the expenses necessary to produce this income that often become the subject of confusion.
These expenses are typically found on Schedule C of a self-employed parent’s tax return. But not all Schedule C expenses are considered “necessary to produce income” under the Child Support Guidelines. The Guidelines specifically disallow some large deductions that are typically found on Schedule C:
- (I) Excessive promotional, excessive travel, excessive car expenses or excessive personal expenses, or depreciation on equipment, the cost of operation of home offices, etc., shall not be considered reasonable expenses.
- (II) Amounts allowed by the Internal Revenue Service for accelerated depreciation or investment tax credits shall not be considered reasonable expenses.
Therefore, it is necessary to take the net income from self-employment shown on Schedule C and add back the above types of expenses. Generally, allowable deductions on Schedule C for self-employed parents will include only actual out-of-pocket costs and not depreciation expense. So, for example, a self-employed contractor can deduct actual advertising expenses such as a newspaper ad for their services, the cost of phones, the cost of labor and materials, gasoline for operating equipment and vehicles, repairs to equipment and vehicles, accounting and legal fees, and the costs of licenses or permits, but can’t deduct the line items his accountant may have taken on the 1040 for depreciation or interest expense for the equipment and vehicles. A self-employed parent is also entitled to deduct the self-employment portion of income tax, which is 7.65% of his allowable gross.
If you are a self-employed parent, calculating support may be a bit more complicated. If you need help deciding what items from your return are allowable and which are not, call us, we can help.