Tax methods used for valuing S corporations

Which tax method do business valuation professionals use to value S corps? The BVWire reports that, during a recent webinar conducted by Nancy Fannon (Meyers, Harrison & Pia), the audience of over 500 listeners was asked this question.

Most add a premium: More than half (55%) of the members of the webinar audience said they deduct income taxes but add a “premium,” using one of six alternate methods. Four of the methods are those promulgated by Roger Grabowski, Chris Mercer, Chris Treharne, and Dan Van Vleet. Then there’s the Delaware Chancery method and Fannon’s simplified method. Fannon observes that most valuators favor the Delaware Chancery model, since it has been embraced by the courts and used in divorce cases.

As for other options, a quarter (25%) of respondents say they deduct income taxes and do nothing else. Twelve percent of respondents favor taking no deduction for income taxes. Fannon pointed out that it’s not surprising that people use this method, as the IRS continues to push for it in the wake of the now-famous Gross case, which rejected the tax affecting of earnings. The remaining respondents (8%) say they deduct income taxes and make an adjustment to the discount rate to account for embedded taxes.

Listen to an archive version of the webinar, S Corps … What a Long, Strange Trip It’s Been, which was produced by Business Valuation Resources.