evaluating an S-Corp for purchase

PaveLowPilot

Since an S-Corporation passes income through the company to the stockholders (in this case a husband and wife ownership), how can I effectively evaluate the income produced by this small business (if I can`t see the owner`s personal tax return)?  I feel like it is very easy for the owner to say, "I only claimed $XX,000 last year on my taxes, but the business really generated $XXX,000 in cash flow to me".

BizOptimizer

I am not a tax expert, but the 1120S (with schedule K) should show company income and all deductions and what was passed to each owner.  What he/she made personally (1040) could have come from many sources - but the 1120S will show what they made from the company?

BizOptimizer

You do need to understand that hesitation to see personal finances is not great.  There COULD be other enterprises that provide or recieve funds from the company that the owner is not transferring with the company.
 
Reluctance by the owner to show personal finances is a flag to increase the intensity of the due dilligence.  At the same time, sometimes an explaination that you aren`t a TAX man - you are looking to verify what you are buying breaks down barriers when it is phrased well.
 
Good luck!

PaveLowPilot

Thanks all,
this has been helpful.  My concern stems from the fact the owner is using a heavy dose of expenses (like car, travel, rents, etc.) to reduce the taxable income from the company.  Don`t get me wrong, I`m not saying its illegal, but it certainly makes it harder for me to see what the actual owner benefit is.  I`ll make sure my accountant takes a good look during due diligence.