evaluating an S-Corp for purchase

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evaluating an S-Corp for purchase

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PaveLowPilot

posts: 4

Apr 15, 2009 8:29 AM ET Quote Report Abuse

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Since an S-Corporation passes income through the company to the stockholders (in this case a husband and wife ownership), how can I effectively evaluate the income produced by this small business (if I can`t see the owner`s personal tax return)? I feel like it is very easy for the owner to say, "I only claimed $XX,000 last year on my taxes, but the business really generated $XXX,000 in cash flow to me".

BizOptimizer

posts: 63

Apr 15, 2009 11:31 AM ET Quote Report Abuse

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I am not a tax expert, but the 1120S (with schedule K) should show company income and all deductions and what was passed to each owner. What he/she made personally (1040) could have come from many sources - but the 1120S will show what they made from the company?

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Ed
Business Optimization - www.businessoptimization.biz

bvmike

posts: 14

Apr 15, 2009 1:19 PM ET Quote Report Abuse

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Ed is correct. Ask for a Schedule K-1 from each partner.

BizOptimizer

posts: 63

Apr 16, 2009 12:47 AM ET Quote Report Abuse

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You do need to understand that hesitation to see personal finances is not great. There COULD be other enterprises that provide or recieve funds from the company that the owner is not transferring with the company.

Reluctance by the owner to show personal finances is a flag to increase the intensity of the due dilligence. At the same time, sometimes an explaination that you aren`t a TAX man - you are looking to verify what you are buying breaks down barriers when it is phrased well.

Good luck!

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Ed
Business Optimization - www.businessoptimization.biz

PaveLowPilot

posts: 4

Apr 18, 2009 11:03 PM ET Quote Report Abuse

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Thanks all,
this has been helpful. My concern stems from the fact the owner is using a heavy dose of expenses (like car, travel, rents, etc.) to reduce the taxable income from the company. Don`t get me wrong, I`m not saying its illegal, but it certainly makes it harder for me to see what the actual owner benefit is. I`ll make sure my accountant takes a good look during due diligence.

Marketingandmore

posts: 46

May 27, 2009 5:28 PM ET Quote Report Abuse

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More and more the IRS is wanting S Corps to document such deductions with original documents such as milage logs, computer logs, cell phone logs, etc. Even though the company may be too small to be forced to include a balance sheet on the tax return, ask for one. This should tell you more. It should also include a comparison of 2 years. Many times this is right on the tax return.

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evaluating an S-Corp for purchase

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