Monday, June 11, 2012

Deferred Salary to Owners

Regarding my blog on various assets and liabilities, one reader responded that, "I recently saw a small business P&L with a liability called 'deferred salary to owner.' He informed me this was an allowable accounting maneuver. By the way, his net profit was showing as 18%."

Yes, that is indeed a legitimate maneuver, for temporarily avoiding payroll taxes. So long as the company can well afford to satisfy this liability at any time in the future this is perfectly Ok.

Unfortunately, what that entry often means more often is that while the owners were entitled to this payroll, the company simply did not have enough funds in the bank to cover that withdrawal while covering the payroll to the rest of the employees. So, they simply defer that payment and thus the entry under "liabilities."

This is one of those liabilities that a buyer doesn't care about, since whether it is satisfied or not does not impact him in regards to purchasing the "hard assets" unencumbered assets of the business.



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