QUANTIFICATION OF LOSS OF INCOME IN SELF EMPLOYED INDIVIDUALS

QUANTIFICATION OF LOSS OF INCOME IN SELF EMPLOYED INDIVIDUALS

 

As we calculate loss for individuals on a payslip for the most part, bank statements and further collateral information, we should not loose sight of the fact that self employed individuals may in their tax returns list legitimate company expenses but the benefits that the individual derive from his business would include such company expenses. Trying to predict the business growth of an individual in a self employed capacity versus that of a salaried employee whose wages are stable and have a clear history, for the most part, statistically in any event, is in itself problematic.

 

To compensate the individual adequately the fraction of individual or family benefit that the plaintiff derived from such a benefit should be taken into consideration when estimations on income is done.

 

A benefit to the individual and family could be salaries paid to the spouse and children and thereby inflating the tax burden of a company and reducing the income of the individual which may be real or may be at a level much higher than the norm. It is advisable to compare this income with that of the standard levels of income as determined by PE Corporate services alternatively by the Patterson levels commonly used and any unnaturally inflated income should be attributed to the individual (plaintiff)

 

Many types of such business expenses that add benefit exist. A good example is a business premises that is also the home of the business owner. The business expenses deducted for power, bond, telephone etc. may all directly benefit the home owner and would dissipate or disappear should the business fail or no longer perform at sub optimum level after the incident.

 

The amount of benefit that an individual derives from after tax benefits should also be taken into consideration for e.g. the purchase of a business computer that is taxable but used for personal use as well. A telephone or Wi Fi service to name but a few and not to mention the company car. Depreciation of assets on a balance sheet can also proof to be problematic as the real market value may differ.

 

It also needs to be taken into consideration that an individual who can no longer perform the work of a sole proprietor may be capable of selling some of the assets of the business after the incident and derive a interest bearing benefit from it. This point of view would certainly have to be argued as the plaintiff is unlikely to accept such a scenario in settlement negotiations.

 

In estimating the individual business owners profits and as such his income it may be easier to calculate the loss by placing the individual in a position of another salaried employee doing the same job and deriving the same benefits rather than trying to decipher complicated accounting statements. This can however be problematic in instances where the individual is reliant on his goodwill or the special business skill he may have derive from his years of being in the industry and a replacement may not be possible. 

 

All in all, determining earning capacity for a self employed individual needs to take place only after careful consultation with the client, forensic auditor and the actuary.

 

economica - Issues in Loss of income calculations for self employed individuals by Scott Beesley