Strategic Advantages and Efficiencies Help Guide Future Decision Making

Key Takeaways:
  • A business valuation can help reduce taxes and align strategies with financial goals.
  • Accurate valuations optimize estate planning, ownership transfers and charitable giving.
  • Valuations can support compliance, minimize liabilities and maximize tax benefits.

 

Leveraging business valuation for effective tax planning can lead to significant tax savings and strategic advantages. Business owners and investors use valuation insights to align their tax strategy with their business goals.

Here’s a guide to how business valuation can enhance tax planning: 

Clean Up Your Balance Sheet 

  • Move excess cash: Make sure all amounts on the balance sheet are understandable, traceable and verifiable. If you have excess cash on the balance sheet, it’s a good idea to distribute it in a lower tax rate environment. 
  • Acquirers like clean balance sheets: Clean balance sheets are appealing to prospective buyers. Many investors find companies with clean balance sheets attractive because the minimal leverage reduces downside risks. 

Determine the Right Structure for Tax Efficiency 

  • Choice of entity: The type of business entity (LLC, S-Corp, C-Corp, etc.) can significantly impact tax obligations. A valuation can help reveal how each structure affects value and tax liabilities, guiding decisions about which form is best for minimizing taxes. 
  • Holding companies and subsidiaries: Creating holding companies or subsidiaries can sometimes reduce taxes on certain income streams or protect valuable assets. A valuation highlights the financial benefit of such structures and their implications on taxes. 

Optimize Transfer of Ownership & Estate Planning 

  • Gifting shares: Business valuation can help establish fair market value, which is crucial when gifting shares to family members or trusts. Lower valuations mean an owner can maximize their annual lifetime exclusion for gifting. 
  • Family limited partnerships (FLPs): Valuations help identify discounts for minority interest and lack of marketability, reducing a high estate tax liability for high-net-worth individuals. 
  • Succession planning: Accurate valuation helps plan for the transfer of ownership while minimizing estate and gift taxes, maximizing the wealth transferred to heirs. 

Support Charitable Contributions for Tax Benefits 

  • Charitable Remainder Trusts (CRTS): By donating a portion of the business to a CRT, owners can receive income while benefiting from a tax deduction based on the valuation of the gift. 
  • Donation of business interests: Valuing a business before donating ownership interest can determine the fair market value for tax deductions, benefiting both the business owner and the receiving organization. 

Plan for Exit Strategies & Capital Gains Tax 

  • Timing the sale of business assets: Valuation helps decide the timing of asset sales, allowing businesses to plan for capital gains tax at optimal times. 
  • Structured sales: Business valuation helps explore structured sale options (installment sales or earnouts), spreading capital gains taxes over several years rather than a lump sum. 

Leverage Tax Benefits of Depreciation and Amortization 

  • Asset valuation for depreciation: An accurate valuation helps assign specific values to depreciable assets, optimizing tax deductions over time. 
  • Goodwill amortization: Proper valuation helps break down the portion of purchase price attributable to goodwill, which can be amortized over 15 years, providing steady tax deductions. 

Handle Tax Implications of Business Restructuring 

  • Mergers and acquisitions (M&A): Valuations are essential for assessing potential tax liabilities in M&A activities, such as asset versus stock purchases, which carry different tax consequences. 
  • Liquidation: Valuation can assist in understanding the fair market value of assets, which impacts the taxes due upon liquidation or dissolution. 

Evaluate R&D Tax Credits & Cost Segregation Studies 

  • R&D credits: Valuation can clarify how R&D efforts contribute to company value, maximizing R&D tax credits. 
  • Cost segregation for real estate: For businesses with real estate holdings, a valuation identifies assets eligible for accelerated depreciation, allowing for enhanced tax benefits. 

Supporting IRS Compliance & Minimizing Audits 

  • IRS valuation standards: A credible valuation report following IRS guidelines strengthens tax positions, reducing audit risk. 
  • Documentation of Fair Market Value: Accurate valuations provide necessary documentation to substantiate fair market value, which can help avoid IRS penalties and interest. 

Questions? 

Business valuation serves as a powerful tool in tax planning by ensuring compliance, reducing liabilities and maximizing tax-saving opportunities. If you would like more information about how a business valuation can enhance your tax planning, contact an Adams Brown advisor.