Knowing the value of a business is important for many reasons, not just for potential sales or investments. It’s also crucial for tax planning and ensuring compliance. Accurate tax valuations make a huge difference for business owners and can help them prevent any potential issues with compliance when it’s time to do taxes. That’s why it’s important to learn more about tax valuations and how they’re done.
Why Valuations Matter
Tax valuations help to determine the fair market value of a business for tax purposes. This is crucial when selling the business, planning a corporate restructuring, and in other situations, like ensuring compliance with IRS regulations. A failure to have an accurate tax valuation done can lead to tax penalties, an audit, over- or underpaying taxes, and other legal complications when selling or merging the business. It is far better to make sure there is an accurate valuation to prevent potential issues.
When Tax Valuations May be Needed
There are a number of situations that may require a tax valuation. When gifting shares, the valuation is needed to report the fair market value for the gift tax. When estate planning, tax valuations can be used to determine estate tax liability. Valuations may also be needed when buying or selling a business, when donating to charities, when changing to or from an S-corp, or even during litigation or divorce proceedings. For any of these situations, the valuation may be vital to help ensure everything is done properly.
How to Do a Tax Valuation
There are different approaches for tax valuations that should be considered, as each can have a different result. The primary methods include the income approach, market approach, and asset-based approach. The income approach bases the valuation on expected future income, while the market approach compares the business to recently sold ones that are similar. The asset-based approach determines the value based on the net assets and may be the best for asset-heavy businesses.
When to Hire an Appraiser
When a valuation needs to be done, it is often a good idea to hire an appraiser. A certified business appraiser should be used when there are significant tax implications, the result must be reported to the IRS, during legal proceedings, or when there will be any scrutiny from external parties. Basically, if the valuation is not being done for the business owner’s own information, it is a good idea to work with a certified appraiser to make sure it’s done right. They may have an ASA, CVA, or CPA?ABV credentials showing their expertise.
Prepare for a Valuation
Even if a business owner elects to work with a professional, it is important for them to make sure they’re prepared for the valuation. They can do this by maintaining clear financial records, documenting all significant changes, timing the valuation properly, and being transparent with the appraiser so they are able to do their job properly.
If you need to have a tax valuation done for your business, it is a good idea to work with the professionals to make sure it’s done right. An inaccurate tax valuation can cause significant issues and make compliance far more challenging, so it’s better to make sure it’s done right from the beginning. Speak with a professional today to learn more about how they can help.
