Frequently Asked Questions
How are personal expenses treated in the context of add-backs?
Personal expenses in the context of add-backs are treated as discretionary expenses, meaning the owner has the freedom to decide how much to spend on them. These expenses are not directly related to the operation of the business and can include perks enjoyed by the owner such as the use of a company car, a cell phone, life insurance, or company sponsorship of a family member's team or event. The purpose of add-backs is to adjust the company's taxable income to reflect the true income that a new owner can expect in the future. Therefore, personal expenses that the previous owner incurred but are unlikely to be incurred by the new owner can be considered as add-backs. This is because these expenses do not represent the actual operating costs of the business. However, determining whether an expense is a legitimate add-back can be complex. It's advisable to consult with an accountant or attorney to ensure proper treatment. As a general rule, if the expenses recur annually, they would not be considered a limited one-time expense and would not qualify as add-backs. If the new owner will have the same expenses, they are not add-backs.
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