In my last article, I discussed the Tax Cuts and Jobs Act passed in December of 2017. I stated that the Act will impact the value of your business.
I raised questions concerning how valuations would be impacted by the following: Pass-Through Entity (PTE) tax relief in the form of a Qualified Business Income (QBI) deduction, the use and application of the Market Approach, and the change of the “Bonus” depreciation percentage to 100% for qualifying assets for a designated time period.
I researched the issues and arrived at the approaches I will use to address these questions. The business valuation community had begun to publish its thoughts and guidance on these subjects. I raised the following questions on the Act’s impact:
PTE Tax Relief
Do all PTEs qualify for the 20% QBI deduction? How does the QBI deduction impact the S corporation premium frequently calculated by valuators under the old tax law? Does the QBI deduction keep the playing field level between PTEs and C corporations when considering the reduction in the corporate tax rate? Do the level of wages in a Company impact the QBI deduction? If so, how? Will models for S corporation (and other PTEs) tax affecting need to change?
Can we rely on market multiples from past transactions, if those transactions were based upon a different tax law structure? Can historical multiples be adjusted for changes in the tax law, and if so, how? Has the market (publicly traded companies) already accounted for the Act in the multiples and general rise in the markets during the end of 2017?
How will the ability to deduct 100% of certain capital expenditures impact future depreciation? How much will the impact to taxable income be?
Business Valuation Review, published by the American Society of Appraisers, recently came out with the Spring 2018 issue. In the issue, there are two articles that present possible solutions to the questions above.
- Valuing C Corps and Pass-Through Entities Under the New Tax Law authored by Daniel R. Van Vleet, ASA, and William P. McInerney, ASA
- Valuing Bonus Depreciation Under the New Tax Law authored by Joseph Thompson, CFA, ASA, and David Neuzil, CFA
Additionally, law firm Duane Morris published a flow chart to assist with the determination and impact of the deduction for QBI for PTEs. The flowchart can be downloaded at the following link:
While discussion of the details of the articles and flowchart is beyond the scope of this article, they can give business owners and other professionals insight into possible answers to the many valuation questions raised by the Act.
Should you have questions regarding the Articles, flowchart, or impact of the Act on a business valuation and the value of your business, please contact me, T. Eric Blocher, Principal and Business Valuation Leader with McKonly & Asbury, at email@example.com.