Effect of the Tax Cuts and Jobs Act on Valuations07-Feb-2018
The wide-reaching provisions of the Tax Cuts and Jobs Act (TCJA) will significantly affect values of businesses and assets. Small business owners and investors in closely-held businesses need to consider carefully whether existing values obtained are reasonable going forward.
Much of the data upon which valuators rely are net of income taxes. Valuators will apply discount and capitalization rates to streams of cash flows (or other benefits) using factors that are derived from after-tax earnings of publicly-held corporations. In addition, when valuing a pass-through entity, such as an S Corporation or partnership, valuators estimate the investor level income taxes. Finally, assets with significant unrealized gains are generally discounted for taxes on capital gains. All of these inputs are affected to one degree or another by the provisions of TCJA.
Cash flow forms the basis for valuation of businesses and assets. TCJA will alter these cash flows in the immediate future and beyond to varying degrees. The impact on values can be significant and the determination of the impact can be a complex process. A prudent investor will consider whether his/her valuation needs to be updated before moving forward on a transaction. Proceed with caution; and, if necessary, consult a qualified valuation expert.
Charles P. Rafferty, CPA, CFE, CVA, ABV, CFF is a member
***The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.