Frequently Asked Questions
What are the legitimate types of add-backs in a business?
Add-backs are adjustments made to a company's taxable income to reflect the true income a new owner can expect. They are used for borrowing money, reinvesting in the business, and determining a fair salary for the new owner. The standard add-backs are known as EBITDA, which stands for Expenses Before Interest, Taxes, Depreciation, and Amortization. Depreciation and interest are added back as they do not represent actual cash outflows for the new owner. In addition to EBITDA, other legitimate add-backs include owner's compensation, overpayment or underpayment to family members, one-time expenses like equipment or vehicles, retirement plan contributions, employee severance payments, lawsuit settlements, personal expenses not related to running the business, and losses due to unexpected events like storm damage or fire. Personal expenses, considered discretionary, are also part of the add-backs. These include the owner's salary, use of a company car, a cell phone, life insurance, or company sponsorship of a family member's team or event. Business-related expenses unlikely to be incurred by new owners, such as certain travel expenses, can also be added back.
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