The flawed report: how a business owner's "income" becomes $670,000 — and why it is really $195,000
A worked example with invented people, an invented company and invented round numbers. It reproduces a method that shows up in real "income available for child support" reports, then corrects it line by line under Wisconsin's rule, Wis. Admin. Code ch. DCF 150, and Winters v. Winters. For the rules themselves, see phantom income and child support in Wisconsin. To run your own numbers, use the worksheet.
General information, not legal advice. Every name and figure on this page is fictional.
The facts (fictional)
- Alex Sample works at, and owns 30% of, Birchwood Cabinet Works, Inc., an S corporation. Two unrelated owners hold the other 70%. The shareholder agreement requires a majority vote to make distributions. Alex can sell the shares under a buy-sell agreement but cannot force a distribution.
- W-2 from the company: box 1 $80,000, box 5 $85,000 (the difference is a $5,000 pre-tax 401(k) deferral).
- Alex's K-1 for the year: box 1 ordinary income $150,000, which includes $30,000 of § 1245 depreciation recapture from the company's sale of old machinery; box 9 net § 1231 gain $20,000 from the same sale; box 16D distributions $60,000, of which $45,000 the company paid so shareholders could cover their tax on the K-1.
- Alex's share of the company's depreciation: $25,000 claimed (mostly bonus depreciation); $10,000 on a straight-line basis.
- Alex's share of the company's retained earnings on its balance sheet: $120,000, built up over several years.
- Alex personally owns a duplex: Schedule E net rental income $6,000. Bank interest: $1,000.
- Alex sold a vacant lake lot for $300,000 (basis $100,000): $60,000 down and a $240,000 note paid over ten years. Under the installment method, $40,000 of gain is reported this year and $160,000 in later years as payments arrive. Interest received on the note this year: $3,000.
The flawed report
This is laid out the way such reports usually are: an income schedule (Exhibit 1) and an adjustments schedule (Exhibit 2).
| No. | Description | Amount |
|---|---|---|
| 1 | Wages — Form W-2, box 5 | $85,000 |
| 2 | Taxable interest — Form 1040, line 2b | $1,000 |
| 3 | Interest on installment note | $3,000 |
| 4 | Ordinary business income — Form 1120-S, Schedule K-1, box 1 | $150,000 |
| 5 | Net § 1231 gain — Schedule K-1, box 9 | $20,000 |
| 6 | Shareholder distributions — Schedule K-1, box 16D | $60,000 |
| 7 | Rental real estate — Schedule E, Part I | $6,000 |
| 8 | Capital gain, lot sale — Schedule D / Form 6252 | $40,000 |
| Total income per returns | $365,000 |
| No. | Description | Amount |
|---|---|---|
| 9 | Add back: depreciation (non-cash expense), shareholder share | $25,000 |
| 10 | Add: deferred gain on installment note receivable | $160,000 |
| 11 | Add: retained earnings available to shareholder (Schedule L) | $120,000 |
| Total adjustments | $305,000 | |
| "Income available for child support" | $670,000 | |
| Per month | $55,833.33 |
Every number traces to a real line on a real form, so the report looks rigorous. The trouble is which lines it adds together. It adds the K-1 income and the distributions paid out of it. It counts gains that won't recur and money that hasn't arrived. It adds a balance built up over years to a single year's income.
The corrected version, line by line
Line 1 Wages (W-2 box 5) rule
Report: $85,000 → Corrected: $85,000
What's wrong: Nothing.
Why: Box 5 is the right starting point: it includes the $5,000 pre-tax 401(k) deferral, which Wisconsin counts.
Authority: DCF 150.02(13)(a)1. & 7.
Line 2 & 3 Interest; interest on the note rule
Report: $4,000 → Corrected: $4,000
What's wrong: Nothing.
Why: Interest actually received is investment income.
Authority: DCF 150.02(13)(a)2.
Line 4 K-1 ordinary income rule
Report: $150,000 → Corrected: $0
What's wrong: Treats a tax allocation as cash in hand.
Why: The K-1 is taxed "whether or not distributed", but that is a tax rule. For support, undistributed income counts only if the parent can individually control or access it. Alex holds 30%, and distributions need a majority vote Alex doesn’t have. Being able to sell shares is not control (Winters ¶10). Both conditions must be present (¶12).
Authority: DCF 150.02(13)(a)9.; Winters v. Winters, 2005 WI App 94, ¶¶9–12, 281 Wis. 2d 798, 804–06; Weis v. Weis, 215 Wis. 2d 135, 141–42; 26 C.F.R. § 1.1366-1(a)
Line 5 § 1231 gain (and the recapture inside box 1) rule
Report: $20,000 → Corrected: $0
What's wrong: Adds a one-time gain on the company’s sale of old equipment as if it recurs, and — like line 4 — without control.
Why: It is part of the company’s undistributed income, so line 4’s reasoning excludes it. Even for an owner with control, it is non-recurring. The $30,000 of § 1245 recapture already sitting inside box 1 repays depreciation deducted in earlier years.
Authority: DCF 150.02(13)(a)9.; 26 U.S.C. §§ 1231, 1245
Line 6 Distributions arithmetic
Report: $60,000 → Corrected: $60,000
What's wrong: Right number, wrong reason: the report adds it on top of line 4.
Why: The $60,000 is cash Alex actually received, so it counts. But it was paid out of the income on line 4, so counting both counts the same dollars twice. Once line 4 is removed, the distribution is counted once. (Most of it, $45,000, covered Alex’s tax on the K-1. Excluding that is an argument Winters did not decide.)
Authority: DCF 150.02(13)(a)10.; Winters ¶¶13, 21 (tax-distribution argument not developed); see the explainer on the unpublished Bjorgo decision
Line 7 Rental (Schedule E) rule
Report: $6,000 → Corrected: $6,000
What's wrong: Nothing.
Why: Counted as reported. Not every line of an expert report is wrong, and a credible rebuttal says so.
Authority: DCF 150.02(13)(a)10.
Line 8 Recognized gain on the lot sale rule
Report: $40,000 → Corrected: $40,000
What's wrong: Nothing in the amount, but the report treats it as recurring.
Why: The $40,000 of gain recognized on the $60,000 down payment is income for this year. Wisconsin has no "windfall" exception. It will not recur, so it is shown separately, and building it into an ongoing monthly order needs the court’s attention (a deviation needs findings).
Authority: DCF 150.02(13)(a)2. & 10.; Wis. Stat. § 767.511(1m)–(1n)
Line 9 Depreciation add-back rule
Report: $25,000 → Corrected: $0
What's wrong: Adds back all depreciation, with no allowance for economic depreciation, for an owner without control.
Why: The add-back is part of measuring undistributed income under subd. 9.a., so it does not apply when that income is excluded. Where it does apply, only depreciation above straight-line comes back ($25,000 − $10,000 = $15,000 here).
Authority: DCF 150.02(13)(a)9.a.–b.
Line 10 Deferred installment gain rule
Report: $160,000 → Corrected: $0
What's wrong: Counts gain on $240,000 of note payments due in future years as if already received.
Why: Not received, and not even taxable yet: under the installment method, gain is reported as each payment comes in. Each year’s payment brings its own gain and interest into that year’s income, so counting it now double-counts later years.
Authority: 26 U.S.C. § 453(a), (c); DCF 150.02(21) (annual income)
Line 11 Retained earnings on the balance sheet rule
Report: $120,000 → Corrected: $0
What's wrong: Adds an accumulated balance — years of past K-1 income — to this year’s income.
Why: The balance is the sum of earlier years’ income, already reported on earlier K-1s. It is a stock, not a year’s income. It can reach support only as an asset, which requires ownership and control, underproductive assets, and either diversion or a standard-of-living need. Even then, the income imputed is the asset’s value times a T-bill-type rate, not the balance itself.
Authority: DCF 150.03(4)(a)–(b); DCF 150.02(15), (21)
The report overstates Alex's income by $475,000 a year. Six of its eleven amounts are right. The whole overstatement comes from five additions (lines 4, 5, 9, 10 and 11). Line 8 is right for this year, but it should not be projected forward as if it will recur.
What if Alex controlled the company?
Most small-business owners do control their companies, and then the answer changes. The first Winters condition is met. The company's federal taxable income, plus depreciation above straight-line, is counted. The owner must prove that any earnings kept in the business are reasonably necessary for its growth (DCF 150.03(2)(b)).
- Measure: $150,000 + $20,000 + ($25,000 − $10,000) = $185,000. The $60,000 distributed is part of that, not an addition to it.
- No proof of business need: income available = $320,000.
- With a documented equipment-replacement plan supporting $50,000 of retention: $270,000.
Even for a controlling owner, three of the report's additions stay wrong: counting distributions on top of the K-1, the balance-sheet retained earnings, and the unreceived installment gain. The worksheet lets you flip the control switch and watch each line change.
Questions
Is this a real report?
No. Alex Sample, Birchwood Cabinet Works, Inc. and every number here are invented. The layout and method mirror a pattern that shows up in real income reports.
Would the answer change if the owner controlled the company?
Yes. With control, the company’s taxable income counts (plus depreciation above straight-line), apart from what the owner proves is reasonably necessary for growth. On these numbers that is $320,000 with no proof, or $270,000 if $50,000 is proven necessary — still well below the report’s $670,000.
Next
How to rebut a report like this (steps, deposition questions, subpoenas, burden of proof) · Build your own report · Business owners and former owners
Informational summary, not legal advice. Wis. Admin. Code ch. DCF 150 as published in Register November 2024 No. 827; Wis. Stat. § 767.511 as updated through 2025 Wis. Act 247. Check for later changes and run a citator check before relying on any citation in a filing.