The short version

Business income reaches the personal return as a net number that nobody outside the business verifies. To read it, you need the business’s own return — Schedule C, Form 1065, Form 1120-S, or Form 1120 — plus three to five years of its bank and credit card statements. For an S-corp, the owner’s real income is salary plus distributions plus what stayed inside. For a C-corp, look at the balance sheet for what the company kept. Personal expenses run through the business shrink reported income and may support a claim for waste (fraud on the community). And in Texas, a court can add depreciation and inappropriate expenses back when calculating child support. Everything below walks through those one at a time.

Definition — LLC (and why it may not show up as a K-1)

An LLC is a legal wrapper, not a tax category — and that matters for where it appears on the return. A one-owner LLC is “disregarded” by the IRS: its income lands on Schedule C (or Schedule E if it holds rentals), with no K-1 at all. An LLC with two or more owners is taxed as a partnership by default and issues a Form 1065 K-1. And either kind can elect to be taxed as an S-corporation, which means a Form 1120-S K-1. So “my spouse has an LLC” could mean any of three places on the return. Find out which, because it decides what to ask for: the full business return behind a K-1, or the Schedule C with the records that support it.

Why the entity type matters in a divorce

Each type leaves a different trail. A Schedule C has no separate return to ask for — the detail lives in the owner’s books and bank statements. A partnership or S-corp has a full business return with a balance sheet and a list of every owner. A C-corp can hold years of profit the personal return never shows. Knowing which one you’re dealing with tells you what to request and where the money could be sitting.

The books and the return don’t match — and that’s normal

Businesses keep one set of books for running the company and prepare the tax return from them with adjustments. Schedule M-1 is where those adjustments are listed. A large gap between book income and tax income isn’t fraud, but it is a question: what was adjusted, and why? Ask for the explanation, not just the number.

What I look for on Schedule C

• →Large or unusual expenses — Anything that spikes relative to prior years without an obvious explanation
• →Prepaid expenses — Paying next year’s bills in December to push deductions into the current year and lower reported income right when it matters
• →Personal expenses through the business — Meals, vehicle use, travel that’s partly personal but fully deducted
• →Cash-based businesses — Less paper trail means higher risk of income that never gets reported
• →Depreciation — If it’s being claimed, there’s a real asset somewhere that needs to be in the asset inventory

From My Practice

Part of my process in any divorce case is reviewing credit card and bank statements — not just the tax return. The reason is simple: the return tells you the total a business spent in a category. It never tells you what the money actually bought.

In one case, I was working through the business credit card statements when I came across a charge for women’s lingerie. The husband and wife had been living apart for some time. There was no business purpose for the charge, and it had nothing to do with the marital household. On the business return, it had been deducted like any other expense — one more number inside a category total. From the return alone, there was no way to know.

That one charge does the two things every personal expense run through a business does in a divorce. First, it shrinks the income the business reports — and smaller reported income means smaller support calculations. Second, it’s community money spent on something outside the marriage, which can support a claim for waste — what the Family Code calls fraud on the community (§7.009). The court can put that money back on paper, as if it were still in the estate, and award the other spouse a larger share to make up for it. Whether it’s a lingerie charge, a personal vacation, or a car the business technically owns, the mechanics are the same.

And one return isn’t enough. In a single year, an expense line is just a number. Across three or four years side by side, patterns emerge — categories that spike during the separation, deductions that appear and vanish, business expenses that quietly grew while the marriage was coming apart. None of that is visible on the face of any one return. It only shows up when you go back to the source documents and lay the years next to each other.

The tax return is a summary. The credit card statement is the evidence. And the pattern across multiple years is the story.

Reported profit is often a shaped number

A business owner can legally reduce reported profit by prepaying expenses, accelerating deductions, increasing retirement contributions, or deferring billing. All of that lowers the figure on the return right when a support calculation or financial disclosure is due. The bottom line on Schedule C is often the result of decisions — not just the natural output of what the business earned. When business income is in play, I almost always recommend a forensic accountant — an accountant who specializes in tracing money through records for legal cases — alongside the legal team.

Definition — Schedule K-1

The annual statement a partnership or S-corporation sends each owner showing that owner’s share of the business’s income, deductions, and credits for the year. It is not a paycheck and not a bank statement — it reports what the business earned on the owner’s behalf, whether or not any cash was actually paid out.

How this cuts both ways

Income never received: A spouse may be paying taxes on business income they never actually got as cash — which is relevant when calculating ability to pay support.

Earnings being hidden: A business can deliberately retain earnings to keep cash out of sight during divorce proceedings, while real value builds up inside the ownership stake. Neither scenario should be taken at face value without looking underneath the K-1 number.

From My Practice

I’m currently working with a client who held a partnership interest in a national consulting firm before he married. He indicated the original stake was acquired prior to the marriage — but in Texas, all property is presumed community unless it can be proven otherwise by clear and convincing evidence. The burden is on the spouse claiming separate property, and that burden is real.

Fortunately, he had his K-1s going back to before the marriage. That’s not always the case — K-1s report ownership as of December 31 of a given year, and marriage dates don’t always line up neatly with that year-end snapshot. When the documentation exists, though, K-1s are one of the cleanest ways to establish what was owned before the marriage and track what changed during it.

In this case, the ownership interest increased during the marriage — and how it increased matters as much as the fact that it did. He earned guaranteed payments from the partnership — the partnership version of a salary — which are community income in Texas, and used that salary to acquire additional partnership units over time. Funds from marital income used to buy an asset make that asset marital property, regardless of how the original interest is characterized. The increase in ownership stake belongs to the marital estate.

What we’re working through now is establishing the baseline — what he owned on the day of the marriage — and measuring the growth from there. When the K-1s exist and the dates line up cleanly, the math is straightforward. When they don’t, there’s a practical middle ground: take the K-1 from the year before the marriage and the K-1 from the year of the marriage, and prorate the difference based on the number of calendar days he was actually married that year. It’s not a perfect science, but it’s a defensible approach both sides can often agree to.

Any time a partnership or S-corporation interest appears on a return, the first question in a divorce should be when it was acquired and how it grew. The K-1 history is where that answer lives.

Definition — Distributions

Cash or property a partnership or S-corporation actually pays out to an owner. Distributions aren’t a deduction for the business and aren’t income to the owner, as long as they don’t exceed the owner’s basis — the income was already taxed through the K-1. They’re the cash side of the K-1, and they’re reported separately from income, on the K-1 itself and on Schedule K of the business return.

Three K-1 numbers to read together

Income — the owner’s share of what the business earned. This is what gets taxed.

Distributions — what was actually paid out to the owner. This is the cash.

Capital account — what the owner’s stake is carried at inside the business. When income is high and distributions are low, this is where the money is building up. Watch how it changes from year to year.

Definition — S-Corporation

A corporation (or an LLC) that has elected to pass its profits through to its owners instead of paying tax itself. The owners report their share on their personal returns whether or not it was paid out. An owner who works in the business must be paid a salary through payroll; profit beyond that comes out as distributions.

Definition — Reasonable Compensation

The salary the IRS requires an S-corporation to pay an owner who works in the business — roughly what it would cost to hire someone else for the same job. It’s a floor, not a formula. Because every dollar above it can come out as a distribution free of payroll tax, owner salaries tend to sit right at it.

Add the three together

For support and for understanding the household’s real cash flow, the owner’s income from an S-corp is: W-2 salary + distributions + profit retained in the company. The first is on the W-2, the second is on Schedule K of the 1120-S and on the K-1, the third is the K-1 income minus the distributions. A salary that hasn’t moved in five years while distributions doubled is a pattern, not a coincidence.

From My Practice

I was working with a couple in a collaborative divorce. The husband had an S-corp, and when I pulled the business return, I noticed tens of thousands of dollars in wages being paid to his children. They were school-age, living with their mother, and nowhere near the business — he had moved out of state for work.

The wages were being funneled into 529 college savings plans for the kids. As a standalone tax strategy, paying your children through a family business isn’t automatically illegal — but it requires the child to be performing legitimate, documentable work. Neither child was performing any work for the business.

The effect on the divorce was significant. Every dollar of those wages ran through the S-corp as a business expense, reducing the net income flowing to the husband’s K-1. For purposes of calculating spousal support and child support, his available income looked tens of thousands of dollars smaller than it actually was.

When I raised it, the husband felt I’d chosen a side. To be fair, this wasn’t the only thing I’d called into question — there were several other figures I’d flagged throughout the process. But the cumulative effect was that I eventually lost my neutrality in his eyes. That’s a cost I’ve accepted more than once — because the alternative is letting numbers stand that I know aren’t right.

Definition — C-Corporation

A corporation that pays its own income tax on its profits. Its owners are taxed only on what the company pays them — salary and dividends. Profit the company keeps is taxed once at the corporate level now, and again at the owner level later, when it’s finally distributed.

Where the value is

Schedule L of Form 1120 is the company’s balance sheet. Read it across three to five years. Rising cash, rising investments, rising retained earnings, and a flat owner salary means the value of the marriage’s stake in that company has been growing while the household’s reported income stood still. If the stock is community property, that growth is part of the marital estate.

From My Practice

Retained earnings can hide a tax bill as easily as they hide cash. I worked with a client whose spouse owned a C-corporation that hadn’t been distributing its profits. The company paid its own corporate tax each year, but the owner paid nothing personally — because nothing was paid out to him. Instead, the company kept the money inside and invested it in precious metals. On the surface it looked like a conservative decision: a business building a reserve.

But the owner’s tax hadn’t gone away. It had been deferred. Every dollar sitting in those metals carried a liability that would come due the moment it was sold and distributed — and the longer the metals appreciated, the larger that liability grew. The business was worth less than its balance sheet said, by the amount of tax that hadn’t been paid yet.

That matters in a divorce because the business gets valued and divided, and the spouse who keeps it inherits the deferred bill. If the valuation uses the gross number, the other spouse gets paid out on value that doesn’t exist after tax. In that case we netted the embedded tax out of the valuation — the same way you’d net depreciation recapture out of a rental property — and the division reflected what the business was actually worth.

It’s a pattern worth watching for any time a business is holding assets instead of paying out profits: real estate, securities, metals, or an unusually large cash balance. The balance sheet shows the assets. It doesn’t show the tax waiting on the other side of them.

The K-1 that looks like nothing: profits interests

In partnerships and LLCs, an owner is sometimes given a profits interest. It’s common in private equity funds, law and consulting firms, real estate deals, and startups. A profits interest is a share of the business’s future profits and growth — but no share of what the business was already worth on the day it was granted. On a partnership K-1, it shows up as a profit percentage in Item J with a capital percentage of zero. The capital account in Item L may start at nothing.

On paper it looks worthless. It isn’t. If the business grows, that interest can be worth more than everything else on the return combined. And if it was granted during the marriage, in Texas it is generally community property. One caveat: if vesting requires continued work after the divorce, the part tied to that future work may be treated as separate — the same time-based split Texas uses for unvested stock options and restricted stock (Family Code §3.007). The vesting schedule is a question to raise, not a reason to ignore the interest.

When a K-1 shows a profit share without a matching capital share, stop and ask three questions. What is it? When was it granted? What would it be worth if the business were sold today?

What that means in practice

The lingerie charge, the children on payroll, the personal vehicle, the prepaid expenses — every example in this guide is a §154.065(b) argument. The business return is allowed to say what it says for IRS purposes. The support calculation is allowed to say something different. Making that argument requires the source documents, which is why the request list above matters.

One limit to know: the guideline percentages apply to the first $11,700 per month of net resources. (The cap was raised from $9,200 on September 1, 2025.) Above that, additional support requires proof of the child’s needs. So how business income is reported matters most for owners near or below that line.

Definition — Goodwill

The value of a business beyond its tangible assets: reputation, relationships, systems, and the expectation of future customers. Texas splits it in two. Personal goodwill depends on the owner as a person — a physician’s or an attorney’s reputation. Enterprise goodwill belongs to the business itself and would survive the owner leaving.

Texas divides enterprise goodwill, not personal goodwill

Personal goodwill is not divisible community property in Texas. Enterprise goodwill is. Separating the two is one of the main jobs of a valuation in a Texas divorce. It’s also why two businesses with the same profits can be worth very different amounts in a settlement.

Where to start

Find out the entity type — it’s at the top of the business return, or on the Texas Comptroller’s franchise tax search. Then give your attorney the request list from this guide. If the business is any size at all, ask early about a valuation expert or forensic CPA; the cost of one is almost always smaller than the cost of dividing a business on the wrong number.

How do I find out what business income my spouse really has in a divorce?

Start with the full business return — every page and schedule, not just the K-1 or Schedule C that reaches the personal return — for three to five years. Then get the business’s bank and credit card statements for the same years. The return shows totals by category; the statements show what the money actually bought. For an S-corporation, add up the owner’s W-2 salary, distributions, and whatever profit was left inside the company. For a C-corporation, look at the balance sheet for retained earnings and investments the owner never took as salary or dividends.

What is the difference between an S-corp salary and a distribution, and why does it matter for support?

An S-corporation owner is paid two ways: a W-2 salary, which is subject to payroll taxes, and distributions of profit, which are not. That creates an incentive to keep the salary low and take the rest as distributions. For spousal and child support, the owner’s available income is the salary plus the distributions plus any profit retained in the company — not the salary alone. The salary is on page one of Form 1120-S; distributions are on Schedule K.

Can my spouse reduce reported business income to lower child support in Texas?

A business owner can legally lower reported profit by prepaying expenses, accelerating deductions, increasing retirement contributions, deferring billing, or running personal costs through the business. But Texas Family Code §154.065(b) lets the court exclude from self-employment income any depreciation, tax credits, or other business expenses shown to be inappropriate when calculating child support. The guideline percentages apply to the first $11,700 per month of net resources (as of September 2025), so how income is reported matters most for earners near or below that line.

What is a Schedule K-1, and does it show what my spouse was actually paid?

No. A K-1 is the annual statement a partnership, multi-owner LLC, or S-corporation sends each owner showing that owner’s share of the business’s income, deductions, and credits. It reports what the business earned on the owner’s behalf, whether or not any cash was paid out. An owner can have significant K-1 income and zero distributions, or large distributions and little K-1 income. Distributions are reported separately on the K-1 and on the business return.

What is a profits interest, and how is it treated in a Texas divorce?

A profits interest is an ownership stake in a partnership or LLC that entitles the holder to a share of future profits and growth, but not to the value the business already had when the interest was granted. On a partnership K-1 it typically shows a profit percentage with a zero capital percentage and a capital account that starts at nothing. It can look worthless on paper and be worth a great deal. If it was granted during the marriage, it is generally community property in Texas. If vesting requires continued work after the divorce, the portion tied to that future work may be treated as separate, the way Texas apportions unvested stock options under Family Code §3.007.

Do retained earnings in a C-corporation count in a Texas divorce?

Yes. Profits a C-corporation keeps rather than paying out as salary or dividends build up inside the company as retained earnings, and if the stock is community property, that value is part of the marital estate. The business is worth more than the owner’s personal return suggests — but less than its balance sheet says, because the owner’s tax on those earnings has been deferred, not avoided. A proper valuation nets that embedded tax out.

What documents should I request for a business in a divorce?

The complete business tax returns for three to five years, including Schedule L (balance sheet) and Schedules M-1 and M-2; every K-1 the business issued, not just your spouse’s; the internal financial statements (profit and loss, balance sheet, general ledger); business bank and credit card statements; payroll reports and W-2s; the depreciation schedule; any shareholder or partner loan records; and the operating, partnership, or shareholder agreement. In Texas, the franchise tax reports filed with the Comptroller are a useful cross-check.

Is a business’s goodwill divided in a Texas divorce?

Only part of it. Texas distinguishes personal goodwill — value that depends on the owner personally, such as a professional’s reputation and relationships — from enterprise goodwill, which belongs to the business itself. Personal goodwill is not divisible community property in Texas; enterprise goodwill is. Separating the two is one of the main jobs of a business valuation in a Texas divorce, and it is why two businesses with identical profits can be worth very different amounts in a settlement.