Mid-Market Inherited Business: Planning for Growth ($500K–$2M)

At this revenue level, your inherited business likely has employees and established operations. Tax planning focuses on entity optimization and managing reasonable compensation.

Payroll obligations are almost certain. Businesses at this revenue level typically have employees, which means payroll tax deposits (Forms 941 and 940), W-2 reporting, and workers' compensation insurance. If the prior owner handled payroll informally, a CPA needs to verify compliance immediately.

Reasonable compensation matters for S-corps. If the business is an S-corporation, the IRS scrutinizes whether the owner takes a reasonable salary before distributions. At this revenue level, the IRS actively challenges owners who minimize salary to reduce payroll taxes. Your CPA should benchmark compensation against industry standards.

Accrual accounting may already be in use. While cash basis is still available at this revenue, the prior owner may have elected accrual. Changing accounting methods requires filing Form 3115 with the IRS, and the Section 481(a) adjustment can create a taxable event.

The tradeoff: Mid-range businesses often have enough revenue to justify professional bookkeeping but not enough to have had it. Expect your CPA to spend time cleaning up prior records.