Frequently Asked Questions
How does owner's compensation factor into the calculation of add-backs?
Owner's compensation is a significant factor in the calculation of add-backs. Add-backs are adjustments made to a company's taxable income to reflect the true income a new owner can expect in the future. One of the key add-backs is the owner's compensation. This is because the new owner has the discretion to decide their own salary, which may differ from the previous owner's compensation. For instance, if the previous business owner paid family members more than the market rate for their work, the new owner could replace them with lower-paid employees or contractors. The difference between the two amounts would be considered an add-back. Conversely, if a family member was paid less than their replacement cost, the company's earnings would need to be adjusted in the opposite direction. Owner's compensation is also considered a discretionary expense, meaning the owner can decide how much to spend on it. This could include perks such as use of a company car, a cell phone, life insurance, or company sponsorship of a family member's team or event.
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