Some reasons for obtaining a valuation are a necessity, such as for determining the value of the business interest in an estate. Other reasons are more elective, but nevertheless helpful to business owners.
Seven tax-related reasons you might have your business valued:
- Valuation of a business or a business interest in an estate. This might be needed not only for the filing of an estate tax return, but also so the personal representative can fulfill the terms of the decedent’s will.
- Valuation of a business or business interest to effect a gift. Effecting a gift will likely require the valuation of a business as long as the federal (and some state) estate tax remains in some form.
- Buy-Sell agreements. These agreements can be needed for tax-related or business-related purposes. If the sale is among related parties, the valuation might be necessary to insure a proper value for estate and gift tax purposes
- Conversion of a C corporation to an S Corporation. A valuation is required to determine the amount of gain that potentially might be recognized on the disposition of property by an S Corporation, which was formerly a C Corporation.
- The taxable sale of a business. During periods when capital gains tax rates are significantly lower than ordinary income tax rates, adversarial positions between buyers and sellers in taxable sales of the stock or assets of a business occur. The valuation can also include allocations of the purchase price for tax purposes and the valuation of personal goodwill to be separated out and provided separately to an individual owner.
- Employee Stock Ownership Plan (ESOP). An ESOP is a qualified defined contribution retirement plan that invests in employer stock. Payments for the stock and for repayment of any bank loans used to purchase the stock come from employer contributions to the plan, which are deductible by the employer. A valuation must be performed annually for an ESOP. This valuation determines the price per share for the beneficiaries of the ESOP plan.
- Tax Deductible Charitable Contribution. Stock in a closely held corporation is sometimes gifted to a charity. In order for the donor to obtain a charitable income tax deduction, an independent valuation must be performed within 60 days (before or after) the date of the gift of the interest to the charity.
There are other tax related valuations that are not as common as those mentioned above, but they are nevertheless important. Filler & Associates can inform you when such a valuation might be needed.