TAX LIABILITY ON BALANCE SHEET
In reviewing the BS for a commercial janitorial and maintenance company I saw a relatively large FICA and Payroll tax liability that seems to be growing YoY (resulting in a negative Owners Equity). Company averages around $1M/yr EBITDA for at least the last three years and has both w-2 and 1099 janitors. Although the owner understands this liability would remain with him after the sale, I am wondering if this is something that will affect my cash flow in future years and should account for it in my modeling in addition to what's on the P/L (e.g., is there supposed to be additional tax expense that's not there today that I need to account for)? I'm not sure why he wouldn't just pay it down given it seems to be generating healthy cash flow and profit. Thanks!
Even in an asset transaction there can be successor liability for certain types of taxes. Payroll taxes that fall into the definition of "trust fund" taxes have personal liability for responsible persons and those responsible persons could be employees that will continue to work for you.
you can also try doing an asset purchase so you don’t inherit liabilities, but check local tax laws. In some places the tax man looks at this as a flee risk for tax collection.
finally, you can try a limited partnership if you can get all employees on it and forget about payroll tax all together. This is a little tricky to do so get a CPA to advice
2) Can't explain the 2018, 2019 increase unless it has to with converting 1099 to W2, or IRS going back and reversing 1099.
3) Such accrual should not impact EBITDA and equity account.
4) Increase in payroll tax liability should result in increase in cash balance or a significant decrease in other liability (like debt).
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