New tax law’s impact on business valuation

BVWireIssue #184-1
January 10, 2018

Corporate and individual taxes impact valuation, so the countless tax changes in the Tax Cuts and Jobs Act will impact many areas of valuation practice. Of course, this is an evolving discussion as valuation experts study the new law and guidance emerges in the form of IRS regs (typically a slow process, though). In the meantime, here are some initial thoughts on what to consider when doing valuations under the new tax law.

DCF: The new law will impact cash flow, but to what extent? Aren’t the tax cuts designed to help increase wages and new hires? Some mainstream economists feel workers may not see much benefit. Will the lion’s share of the tax cuts go to fatten after-tax corporate profits or will businesses reinvest?

Market approach: How will your use of the market approach be affected? Will multiples change or has the market already reflected the effects of the new tax law? Will there be a changing gap between the income and market approaches?

PTE tax relief: Owners of pass-through entitles get new tax relief. How will that and the corporate tax cuts affect the advantage S corps have had over C corps? What about the PTE valuation premium? Models for S corp tax affecting will need to be adjusted.

Reasonable comp: The deduction related to the new PTE tax relief is intertwined with an owner’s reasonable compensation as well as other variables. The desire will be to balance the owner’s pay with these other factors to optimize the deduction (the Section 199A deduction). Because of the increased spotlight, the fundamentals of determining reasonable compensation will be more important than ever.

Estate tax: With the increased limits on estates, will valuations for estate tax purposes dry up? The step-up in basis remains, but it may be less of an issue if the subject entity is way under the limits.

This is just the tip of the iceberg, so stay tuned for more coverage. You can read some initial impressions from several top valuation experts in the February issue of Business Valuation Update.

What to do: Learn all you can about the provisions of the new tax law to make sure your valuation methodologies are adjusted for the new reality. Also, make sure the new tax landscape is reasonably reflected in the business models of the entities you’re valuing.

What are your thoughts? Join BVR’s LinkedIn group and add to the discussion of the new tax law!

Extra: Join us for a webinar on February 8: 2018 Tax Cuts and Jobs Act: Impact on Valuations of C corps and Pass-through Entities, with Daniel R. Van Vleet (The Griffing Group).

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