Empowering Professional Success

In the tax code, there are accounting options that allow professional services firms to be cash basis regardless of revenue. This is beneficial to professional services because you only pay tax on cash you have received. Receivables or billings is generally the primary difference, but cash accounting also lets you deduct a profit sharing contribution to a qualified employee benefit plan but fund it in the following year.

Generally, this is done as a factor of revenue or a multiple of net income. Many variables come into play like “normalizing” compensation, fringe benefits, and related party rents, for what an outside party would pay. But the biggest driver is the ease a purchaser will have generating positive cash flow. This is done through specialize revenue streams, recurring revenue, or a well-managed operation by the staff.

GAAP means Generally Accepted Accounting Principles. It is the type of accounting publicly traded companies use. Although many people feel they don’t need “fancy” accounting, it is the most representative of the actual results. For example, billing. You could perform work in October, bill it in November and collect it 60 days later in January – when should you record revenue? GAAP would say in October when you performed it, cash basis would say in January when you collected it.

That is an open question with no easy answer. The member control agreement should layout how the partnership should work, but often there is contradictory wording, or confusion about what happens in a loss situation. The best are done at the beginning of operations and are reviewed annually, and most importantly, understood by all members.)