Tax & Compliance Valuation
IRC 409A
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For early-stage companies, stock options or deferred compensation play a significant role in attracting and retaining the right talent. Since most companies have stock options as an integral part of their employee compensation structure, understanding the importance of the right valuation of stock options and conformance to IRC 409a is essential. Undervaluing stock options under 409a leads to significant penalties for employees. In contrast, overvaluation leads to a loss for employees as they receive less income due to a higher exercise price. Hence, it is of utmost importance that the valuation of deferred compensation is performed by a competent, independent professional appraiser with expertise in private company valuations and a sound understanding of the nuances of IRC 409A.
At Knowcraft Analytics, we provide end-to-end 409a valuation services of the highest quality to some of the leading valuation advisory firms in the US. Our team of seasoned valuation professionals is geared to help you maintain your quality of services while providing scalability, at a very cost-effective offshore pricing model. Our strong internal processes and controls ensure that our 409a valuations are robust and defensible to the auditors and IRS, as well as very fair and transparent to clients’ employees. All these factors together ensure that your clients sail through their future tasks, whether expensing, audits, M&A, or an IPO.
Gift & Estate Tax
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The valuation report for estate and gift tax purposes is subject to IRS review. Hence, it is essential that the valuation is performed by a qualified appraiser with expertise in gift and estate tax valuations and by adhering to the appropriate IRS guidelines.
Our valuation experts consider all the relevant factors, such as the timing of gifting, control and marketability discounts, multiple ownership structures and appropriate business valuation methodologies, to provide your clients with an insightful estate valuation report compliant with the IRS guidelines.
S-Corp Election
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A C-Corp entity elects to convert into an S-Corp primarily for two key taxation considerations:
- Unlike a C-Corp, an S-Corp, being a ‘pass-through’ entity, need not pay tax at the company level or on the dividends distributed; instead, its members pay taxes on their share of profit based on their individual tax rate;
- Distribution of ESOPs is tax-exempt for an S-Corp entity.
Pursuant to the IRC Section 1374, a corporation opting for an S corporation election requires a valuation to determine the built-in gain. Built-in-gain is the gain in asset value from the date of the S corporation election. The timing of this election is a key decision to be made by business owners as they need to pay taxes on the differential between the fair market value and tax basis of assets as of the conversion date.
It is very evident how complex and tricky this S-Corp election can be for your clients. While inaccurate valuation could put the business owner in jeopardy with higher tax liabilities, a thorough valuation analysis would help save taxes in the long term. Through our reliable outsourcing valuation services, we reduce tax risks and deliver high-quality, timely analysis.
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Intellectual Property Valuations for Transfers
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In the dynamic landscape of modern business, enterprises are continuously exploring creative methods to leverage their IP assets to the fullest. The spinout of IP rights allows enterprises to focus on their core strategic and operational areas while potentially monetizing the IP related to non-core areas.
At Knowcraft Analytics, we understand the dynamic nature of intellectual property valuation. Our seasoned professionals stay current with industry trends, regulatory requirements, and market fluctuations to offer accurate and insightful valuations, adhering to the Uniform Standards of Professional Appraisal Practice (USPAP) standards and enabling our clients to make well-informed decisions. Whether it’s a brand, patent, or R&D asset, our outsourcing valuation services are tailored to support informed decision-making, M&A strategy, and regulatory requirements.
Purchase Price Allocations (Under Sec. 1060)
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The differentiating factors between financial and tax reporting PPA include standard of value, calculation of purchase price, treatment of transaction costs, deferred taxes, and accrued liabilities.
PPA for tax reporting is essential when an acquisition is an asset deal or stock deal with an IRC Section 338 election. Pursuant to Section 1060, purchase price allocation is performed using a residual method with assets divided into classes, such as below:
Class I: Cash and cash equivalents
Class II: Marketable securities
Class III: Other assets marked to market annually
Class IV: Inventory
Class V: Land, buildings and personal property
Class VI: IRC section 197 – intangible assets except goodwill and going concern value
Class VII: Goodwill and going concern value
Our valuation professionals are well-versed with the intricacies of PPA for tax reporting purpose and provide robut analysis to be compliant with the IRS provisions. We assist valuation and advisory firms through efficient outsourcing valuation services, ensuring timely delivery and audit-defensible outcomes.
Net Operating Losses & Carryback/Forward Provisions
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Net Operating Loss (“NOL”): For income tax purposes, an NOL is generated when an entity’s allowable deductions exceed its taxable income in a given tax period, and the Internal Revenue Service (“IRS”) permits the entity to utilize the loss to reduce taxes from previous years or carry it forward to offset taxable income in future years. This enables the company to reduce the tax liability of the business.
Historically, NOL rules have been revised several times during the past few years. Before 2017, NOLs were fully deductible and could be carried back two years and carried forward 20 years. In 2017, with the introduction of the Tax Cuts and Jobs Act (“TCJA”), rules for deducting NOL changed. The changes included:
- Limiting NOL incurred after December 31, 2017, to 80.0% of the taxable income rather than 100%
- Prohibiting NOL carryback.
- Removing the 20-year limit on NOL carryovers.
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act further delayed the above rules for a temporary period. It allowed NOLs arising for years beginning 2018 through 2020 to be carried back five years. Additionally, the 80.0% NOL deduction limit was temporarily lifted for NOL carryforwards to years beginning before January 1, 2021.
As of today, most companies do not have the option to carryback NOLs. At the federal level, while the companies can carry forward their NOLs indefinitely, the deductions are limited to 80.0% of the taxable income.
Our team of valuation experts has been adeptly calculating and implementing the nuances of NOL in the past few years. Our valuation reports withstand the scrutiny of tax authorities and aid in effective tax planning for clients.
Built-In Gains Taxes
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In order to address this potential issue, the IRS introduced built-in gains taxes. The built-in gains tax is generally applied to C corporations that elect to convert into an S corporation. This tax is applied on the gains recognized on the assets sold within 5 years following the conversion date. It is noteworthy that the built-in gains taxes are not payable until the asset is sold.
Built-in gains tax is calculated as the difference between fair market value and adjusted tax basis of the assets. NOLs, capital losses, minimum tax credits, and business tax credits that are carried over from C corporation tax years can be used to reduce the built-in gains tax liability.
With our experienced professionals and strong outsourcing valuation services, we help estimate the built-in gains taxes for our clients, thereby helping them in making informed decisions.
Parachute Payments and Non-Compete Agreements (Under Section 280G)
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Section 280G is applicable only if the aggregate value of parachute payments equals or exceeds three times the individual’s base amount. If Section 280G applies, excess parachute payments are measured as difference between parachute payments and one-time the individual’s base amount. Excess parachute payments are subject to 20.0% excise tax. Base amount is the average annual compensation for the five taxable years prior to the year in which change in control occurs.
Excess parachute payments can be reduced by the value ascribed to the non-competition agreement. Some portion of parachute payments can be attributed to the non-competition agreement, which would keep the parachute payments below the three times base amount. Consequently, Section 280G is not triggered.
Our team of valuation experts possesses a deep understanding of the nuances of Section 280G and delivers robust valuation analysis. These valuations withstand the scrutiny of tax authorities and aid in effective tax planning for clients.
Why Choose Knowcraft for Valuation?
Case Studies
Sales and Collection Reconciliation
Discover how a QSR business streamlined sales reconciliation, tracked collections, and improved profitability using POS reports, QuickBooks, and ERP tools.
Accounts Payable Migration – Streamlining ERP Transition
The transition to a new ERP presented a dual challenge: We needed to establish AP processes within the new system and had to contend with a significant backlog of invoices awaiting processing. We had to devise innovative solutions to streamline and manage the AP process efficiently.
Transition from C-Corp to S-Corp
The Company intended to change its tax status from being a C-corporation (“C-Corp”) to an S-corporation (“S-Corp”) for tax planning. We had to set up a new entity in QuickBooks and transfer all assets and liabilities from old books to new ones.
Frequently Asked Questions
Why do I need tax and compliance valuation services?
Which factors are considered in tax and compliance valuations?
When is tax and compliance valuation required?
Whenever business owners require estimation of value of the company’s securities, businesses or assets, tax and compliance valuations are required. These are necessary in situations such as:
- Granting stock options or deferred compensation
- Estate planning
- Gifting to family or beneficiaries
- S-Corp election
- ESOPs
