Case Study Business Advisory

Helping a Client Clean Up an Acquisition

A client wanted to acquire a cleaning service. But projected cash flow indicated that the company's accounting method and tax status would make it difficult to pay off the acquisition debt. The company paid taxes on income when it was earned, giving it little chance to build up capital.

After consultation and study, we developed a plan for the client to adopt S Corporation status. Similar to a partnership, S Corporations pass income or losses and other tax items on to their shareholders, thus avoiding paying federal tax directly. We also advised electing the cash method of accounting under the Internal Revenue Code, which is suitable for a service company without significant inventory.

Here's how it worked:

Under the plan, the cleaning service recognized income for tax purposes when payment was received, but was able to recognize income for accounting purposes when the services were rendered. In fact, the company could build up capital by deferring taxes on its accounts receivable. In a new and growing company, this deferral meant postponing taxes for years to come, allowing the company to grow and prosper.

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