Month: August 2019

How to Value Your Business

This overview can help you understand the approaches, methods and factors important to valuing your business

How to Value Your BusinessRevenue Ruling 59-60 was issued by the IRS to “outline and review in general the approach, methods and factors to be considered in valuing the shares of the capital stock of closely held corporations for estate and gift tax purposes.”  This revenue ruling is regarded as the foundation of modern business valuation, and although issued sixty years ago, the approach, methods and factors set forth therein are still used in every business valuation, including valuations of business entities other than corporations.

Revenue Ruling 59-60 lists the following eight fundamental factors that require careful analysis in each case.

  1. The nature of the business and the history of the enterprise from its inception.
  2. The economic outlook in general and the condition and outlook of the specific industry in particular.
  3. The book value of the stock and the financial condition of the business.
  4. The earning capacity of the company.
  5. The dividend paying capacity.
  6. Whether or not the enterprise has goodwill or other intangible value.
  7. Sales of the stock and the size of the block to be valued.
  8. The market price of stocks of corporations involved in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the counter.

Approaches to valuing a business

The three basic approaches in valuing a business are the asset approach, the income approach, and the market approach.  The factors listed above include the analysis required to value a business under each of these approaches.

Asset approach

Under the asset approach, the value of the business is the value of the net tangible assets.  This method does not consider goodwill or other intangible assets and is most commonly used in the valuation of real estate entities.  This method may also be applicable to unprofitable businesses and those in or close to liquidation.

Market approach

The market approach consists of two methods, the guideline public company method and transaction method.  Under the guideline public company method, the financial attributes of the subject company including but not limited to sales, earnings, cash flow, total assets, net book value are compared to the same attributes of publicly traded companies in the same or similar industries, and with fairly complex analysis, the value of the subject company is determined by comparison to the stock price of the publicly traded company.  This method is generally not applicable to small businesses because they are not usually comparable to publicly traded companies, even those in the same industry.

Under the transaction method, the value of the subject company is determined based on analysis of and comparison to the financial attributes of similar companies that have sold in private transactions.  This method is used when there are enough comparable transactions, and enough financial information about these transactions is available.

Income approach

Under the income approach, a measure of income (generally normalized cash flow) is capitalized or discounted to estimate the value of the company.  Capitalization is used for historical cash flow; discounting is used for projected cash flow.  The capitalization rate is based on risk, that is, the risk that the expected cash flow will not be realized.  Common closely held business risks considered in this process include customer or supplier concentration or diversification, depth of the management team, product obsolescence, prospective competition, and the state of the industry in which the company participates.

Learning more about business valuation

This is a ten-thousand-foot view of business valuation.  Future posts will provide detailed information of things discussed here.  Many of the factors considered are controllable, and factors reducing business value can often be improved.  Those who are considering the future sale of a business and want to maximize its value should start thinking about this now.  If you wait until you are ready to sell, that is usually too late.  The first step is to understand the current value of the business, and what are the factors driving that value.  After that, the valuation can be periodically updated, which will be a gauge of progress in increasing value.

Visit our business valuation page to learn more about our business valuation services and  contact us if you want to discuss planning the future of your business.

Pay off Your Student Loans

Pay off Your Student LoansIt is payday and you see your paycheck hit your bank account just in time to pay your student loans.  How depressing.

Paying your student loans may seem like it will last forever, but there are ways improve your repayment plan and pay off your loans faster.

Pay more than the minimum payment

This is one of the fastest ways to relieve your student loan debt.  These days, most payments are done online. You can simply go online each month and pay your minimum payment, plus an additional payment.  This additional payment can be whatever amount you feel comfortable paying at that time. Some months you may want to make a larger additional payment than other months.  For instance, in a month where you get a bonus or a money gift, you may want to put this “found money” towards your student loans.

It is important to ensure that all extra payments are applied to principal and not the next month’s minimum payment.  Some lenders may require a written letter specifying that any additional payments made are applied to principal of the loan.  Other lenders may have an option online when a payment is made to categorize the extra payment towards principal. By doing this, you can reduce the interest on your loans.  Keep in mind that most lenders reduce your interest rate by setting up automatic payments. You should also always pay towards your highest interest loans first as interest accrues faster on these loans.

Consolidate and refinance your loans

Interest rates on student loans can vary from 4% to 9%.  If you’re like the average graduate, with three to six different loans with differing interest rates, and you are a good candidate refinancing at a lower interest rate. By consolidating, you also free yourself of the burden of making multiple monthly payments.  Your consolidated loan will have one monthly payment.

This approach is not for everyone.  You would only want to refinance if you can reduce your interest rates.  Right now, refinancing rates on student loans are as low as 3%. Banks that offer student loan refinancing and relief include NerdWallet, Sofi, and Citizens Bank.  Each bank and lender offer different programs and individualized rates, which are usually based on credit history and annual income.

Student loan interest deduction

Don’t wait to pay your student loans.  If you are in loan deferment, a grace period, or in school, make payments sooner.  During these periods where you are not paying your loans, interest is accruing which increases your overall loan obligation.

Some good news: the IRS offers a student loan interest deduction of up to $2,500 per year.  Keep in mind that you may not be able to deduct the full $2,500, as this deduction phases out between $65,000 and $80,000 for a single taxpayer, and $130,000 and $160,000 for a married filing jointly taxpayer.

When filing your taxes, there is no need to look through your loan statements to calculate the interest paid.  Your lender will provide you with Form 1098-E, which will show the total student loan interest paid in the current year.  You will receive one form for each loan.  If you are married, you can also deduct student loan interest paid by your spouse if you file a joint tax return.  The only requirement is that you must be legally obligated to repay the loan.  This means that you or your spouse must be the responsible party for the loan.

We’ve got your back

It is important to tackle student loans early in your career.  By doing so, you will improve your credit, become student loan debt-free, and start saving for your future.

Lance Aligo, CPA, MSA, is a senior accountant at KRS CPAs, LLC, located in Paramus, NJ.  You can reach him at [email protected] or 201-655-7411.

What Changes With the New Taxpayer First Act?

The Taxpayer First Act of 2019 is redesigning how the IRS works with taxpayers, even though it may take a while for many of the provisions to take effect.What Changes With the New Taxpayer First Act?

Some experts have highlighted the following aspects of the bill as especially important:

An independent appeals process. Taxpayers and small businesses will be able to challenge the IRS’ position without undertaking the cost and expenses of court. IRS Appeals will be an independent unit that grants taxpayers access to case files. Taxpayers will be able to protest if denied an appeal.

Innocent spouse treatment. The new law requires the U.S. Tax Court to take a fresh look at innocent spouse cases without taking previous decisions into account.

Modification of procedures for issuance of third-party summons. This is an important protection for taxpayers, especially small-business owners. It discourages the IRS from bypassing the taxpayer and contacting third parties — such as financial institutions — instead for information. The IRS should give taxpayers a meaningful opportunity to provide the information it is seeking prior to its contacting third parties. In practice, the IRS should provide the taxpayer with an understanding of what the issue is, what information is being requested and how the requested information relates to the issue.

Office of the National Taxpayer Advocate. The Taxpayer First Act has taken a strong approach with the Advocate’s issuance of Taxpayer Advocate Directives, which focus on systemic problems taxpayers deal with. Once they are issued by the Advocate, the IRS should comply within 90 days. The Advocate Annual Report will identify any TAD that is not honored by the IRS.

Credit card payments. The IRS is now allowed to directly accept credit and debit card payments for taxes; the taxpayer must pay any processing fees. The Act also requires the IRS to try to minimize processing fees when entering into contracts with the credit card companies.

Whistle blower reforms. The Act provides protections from retaliation and allows for better communication with whistle blowers about the status of their claims.

Cyber-security and identity protection. The IRS will now have to let taxpayers know whether it suspects there is evidence of identity theft. The Agency will explain to taxpayers how to file a report with police and how to protect themselves against additional harm resulting from the identity theft.

Taxpayer Act levels the playing field

Rep. Kevin Brady, R-Texas, ranking member of the Ways and Means Committee, was quoted as saying the Act “levels the playing field to ensure taxpayers have the same information as the agency, better protects our taxpayers’ information, and reins in past IRS abuses to guarantee families and local businesses never have to fear having their accounts and property seized without fair and due process.”

As with many new laws, it will take some time to see what specifically the effects are. The legal provisions are complex and will require interpretation over time. We’ll be keeping an eye on the developments.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.