Tax Liability on Balance Sheet

investor profile

March 19, 2021

by an investor from Florida Institute of Technology in Melbourne Beach, FL, USA

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!

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commentor profile
Reply by a professional
from Villanova University in New York, NY, USA
The payroll tax deferral was permitted from March 27, 2020 to December 31, 2020, so if you see it continuing to build after year-end, you know you have another factor at play here. Another thought not mentioned above are rising minimum wage and to a larger degree a general increase in wages. So if there is a rise in wages and the business is growing, you would expect to see payroll tax liability and other payroll liabilities increase. The Seller could also be accruing for bonuses and associated payroll taxes. Lastly, be sure to ask how they accrue for these items and get an example calculation. Given pay period and pay date cadences, it's possible they are doing it incorrectly. Best of luck and let me know if you need a second set of eyes when you get an answer. redacted
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Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
They are probably taking advantage of the payroll tax deferral and 50% is due 12/31/21 and the other part 12/31/###-###-#### All of my clients require sellers to pay this off at closing. Payroll taxes are not something to take lightly and depending on the structure can have continued or successor liability. Here is an article on the payroll tax deferral we published:

https://www.plantemoran.com/explore-our-thinking/insight/2020/09/employee-payroll-tax-deferral-guidance
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