The estimation of losses of self-employment income is generally less straightforward than that of a wage earner. It is commonly the case that the simple bottom line numbers alone are looked at, but a more sophisticated approach may yield more meaningful results. Past business results are useful aids, but the business's underlying growth (or decline) trend needs also to be taken into account. It is more difficult when a business has little or no track record, but even in such an instance it is possible to produce estimates of business losses.
In general terms, an injured self-employed individual will incur losses for one (or both) of two reasons. Firstly, sales might have declined, stagnated or grown by less as a result of the accident. Secondly, the business might have incurred additional expenses. Chief among the latter might be hired help to replace the owner's labour. However, other expenses can also increase after an accident, often because of less owner supervision of employees or of replacement labour's less experience or care in handling materials.
Often, the net income reported on the tax returns is a poor indicator of a business's level of profitability in a given year. This can be the case for a number of reasons. At one extreme, "cash" sales might be un- or underreported. Others might include an "aggressive" amount of personal expenditures. Finally, certain expenses even when claimed in strict accordance with the tax laws might still not represent a genuine economic outlay of cash for business purposes, which means that they do not really reduce an individual's income. Many motor vehicle expense and business use of home claims are of this nature.
Sometimes an individual's business has no records, or it has records in such a fragmentary state so as to be useless on their own. In such a case, Turnbull and Company can borrow a trick from the Canada Revenue Agency. In principle, if household expenditures can be known or estimated, all other sources of income accounted for, and the change in net savings/debt measured, then the remaining variable must be the person's business income. The usefulness of this method arises because many household expenditures (e.g. mortgage, utility bills, credit card statements) are obtainable from external sources, as are bank records recording savings/debt. Other expenditures (e.g. food and clothing) can be estimated reasonably accurately using statistical data on household expenditure. Any other household income is probably known from T4 slips, etc. Thus, even when the actual business's records do not exist, it is often the case that a reasonable estimate can still be made of its underlying income.
Turnbull and Company can also be of assistance in the estimation of losses of business income arising from other reasons besides personal injury. We would be pleased to discuss the particulars of your case with you.
Sometimes with business losses it is easiest to just have the accountant or economist deal directly with your client.
Call Kevin or Carol at 778-298-1781 to discuss your particular case.