Business Buying Pitfalls: How Does Unrecorded Cash Sales Affect a Business’s Bottom Line?

When a business sells a product or service and doesn’t declare the income on its financial statements, you might assume that if you add that same amount to the owner’s profit at the bottom of the profit and loss statement you will have an accurate number. The truth is that when you change the gross income or gross sales number other numbers are also changed.

The sales tax expense number also goes up. Part of that cash, not declared, belongs to the State Board of Equalization as sales tax collected and not paid.

Business Taxes Vary from City to City

In some cities the business tax is tied to the gross income. So when you have cash income not declared the tax would be higher. I am a member of the Southern California Business Brokers Association. One of our members moved out of Los Angeles because the city sent him and his agents tax bills totaling over $60,000, because his firm earned real estate commissions in the City of Los Angeles. The city of Oxnard did the same thing to a broker based in Westlake Village that sold a business located in Oxnard. They wanted $5,000 as a city license tax for doing business in Oxnard.

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