There are many legitimate reasons for a business to retain earnings. However, for a spouse in a divorce — or contemplating divorce — leaving money in the business may be viewed as a tool to shield income to avoid support. For shareholders of an S corporation, even though earnings have not been distributed, they will appear as “phantom income” on the owner’s personal tax returns. Given how frequently these issues arise in our practice, there is surprisingly little New Jersey precedent addressing the treatment of retained earnings in the context of divorce.
This article examines whether, and under what circumstances, retained earnings can be considered as income for the purpose of determining support.
