Tax & Compliance Valuation

Knowcraft Analytics provides comprehensive valuation services for tax and compliance purposes to valuation and advisory firms in the US. The offerings include IRC 409A, ESOP (IRS 401A), gift and estate tax, and S-Corp election, among others.
Tax planning and compliance are critical components of a business, which necessitate the valuation of businesses and securities. In a dynamic regulatory environment with frequent changes in tax laws, it is imperative for appraisers to understand the nuances of tax-related provisions while developing a defensible valuation. Our valuation experts possess rich experience in dealing with inherent complexities surrounding tax valuations. Our team stays abreast of the recent developments in the tax rules and decodes their impact on valuation. Our rigorous valuation analysis, backed by profound tax, financial, and industry knowledge, can withstand the scrutiny of tax and regulatory authorities such as the Internal Revenue Service (“IRS”).

IRC 409A

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A 409A valuation is a process of determining the value of the Company’s common stock to meet the legal requirements associated with issuing deferred compensation to the employees under the Internal Revenue Code (“IRC”) 409A. A 409A valuation needs to be performed at least once every 12 months or earlier in case of significant changes, such as a new financing round or a change in the Company’s business operations.

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 loss to 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.

Employee Stock Options

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ESOPs, pursuant to the Employee Retirement Income Security Act (“ERISA”) of 1974, are regulated by the Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”).

Over the years, ESOP plans have evolved to become increasingly complex in nature to ensure compliance with the laws and to tie in with the reported financials of companies. This continued evolution of ESOP agreements has caused valuation experts to be on their toes and remain constantly updated with the latest regulations, court case rulings, and industry best practices to meet newer challenges.

Knowcraft Analytics provides comprehensive ESOP-related services, including deal-related fairness opinion, deal structuring, annual ESOP valuation plan revisions, expensing advice, option redemption and cancellations, as well as responding to assessment queries by the auditors, IRS and DOL.

Gift & Estate Tax

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A business, an asset or an estate has the potential to ‘live on’ forever, but not its owner. Therefore, the business owner must establish an effective succession plan well in advance. Any estate valued over $12.92 million (in 2023) left intestate is subject to federal estate tax of up to 40% unless its ‘gifting’ to the legal heirs is properly planned for. One of the key elements of successful estate planning is the minimization of estate tax through a proper valuation of estate assets.

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 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.

Intellectual Property Valuations for Transfers

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The strategic transfer of intellectual property (IP) assets has become an indispensable tool for companies looking to enhance their portfolios and unlock hidden value. IP valuations for transfers represent a sophisticated approach to leveraging your company’s intellectual capital to create spinouts and drive strategic initiatives. Transfer of IP may involve the creation of a new private company based on the IP transferred from a university or an existing business enterprise. The IP rights may be assigned to the new company or licensed to them on exclusive or non-exclusive terms.

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.

Purchase Price Allocations (Under Sec. 1060)

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A purchase price allocation (“PPA”) is an allocation of purchase consideration to assets and liabilities acquired in the transaction. In addition to PPA performed for financial reporting requirements in accordance with FASB ASC 805, PPA is also performed for tax reporting requirements pursuant to the Internal Revenue Code (“IRC”) Section 1060.

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 IRC Section 338 election. Pursuant to Section 1060, purchase price allocation is performed using 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 intricacies of PPA for tax reporting purpose and provide robut analysis to be compliant with the IRS provisions.

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. Prior to 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:

  1. Limiting NOL incurred after December 31, 2017 to 80.0% of the taxable income rather than 100%
  2. Prohibiting NOL carryback.
  3. 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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The gain recognized on the sale of assets by a C corporation is effectively taxed twice – at the corporate level, and then at shareholder level. As such, it is a lucrative option for C corporations to convert to S corporations, where the gain is typically taxed only once i.e., at the shareholder level.

In order to address this potential issue, 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.

Our team of valuation experts has assisted several companies to help estimate the built-in gains taxes for their clients, thereby helping them in making informed decisions.

Parachute Payments and Non-Compete Agreements (Under Section 280G)

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Section 280G of the Internal Revenue Code (“IRC”) outlines provisions for golden parachute payments. Parachute payments are form of compensation paid to executives, highly compensated individuals and shareholders owning more than 1.0% of outstanding shares upon change in control. Some examples of parachute payments are transaction bonuses, severance payments and accelerated equity compensation.

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 value ascribed to the non-competition agreement. Some portion of parachute payments can be attributed to 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?

Executed Over 10,000 Engagements
Acted as an Advisor to Help Clients Venture into New Service Offerings
Reduced Turn around Time by ~40%
Helped Scale Businesses from a Single-Member Team to a 40+ Member Strong Team
Enabled Business Growth through 50%-100% Increase in Revenue and 30%-50% Improved Margins

Case Studies

Benefits of ERP Transition: A Case Study 

Benefits of ERP Transition: A Case Study 

In the fast-paced world of business, staying competitive often necessitates upgrading systems to meet growing needs. This case study explores the journey of Company X as it transitioned from one Enterprise Resource Planning (ERP) vendor to another. The case study highlights the constraints, proposed solutions, and outcomes achieved. 

Contingent Consideration Valuation

Contingent Consideration Valuation

THE CLIENT AND THE ASK: A pharmaceutical company (the “Acquirer”) acquired a biotechnology company (the “Company”) in exchange for an upfront payment and certain payments contingent upon successful achievement of future regulatory and sales milestones for certain...

Forecasting and Valuation

Forecasting and Valuation

THE COMPANY AND THE ASK: The Company is a technology company with a business proposition to provide diagnostic services to rural India and reduce the turnaround time of getting the report from 24 hours to 1 hour. The Company was operating using multiple business...

Frequently Asked Questions

Why do I need tax and compliance valuation services?

Valuations performed for tax and compliance services are intended to assess the value of securities, assets, and businesses in accordance with tax codes to determine tax liability. A well-documented valuation is necessary to withstand the scrutiny of IRS and tax authorities, to avoid the penalties and to determine accurate tax liability.

Which factors are considered in tax and compliance valuations?

Factors such as the company’s financial performance, industry dynamics and market conditions are evaluated while performing valuations for tax and compliance purposes.

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

How often tax and compliance valuations are required?

While there is no set timeline or frequency at which valuations are required except for 409A, changes in the company’s conditions such as financing or change in business model or change in market conditions necessitate valuations.

What information is required for conducting tax and compliance valuations?

We provide a detailed information request list which covers items required to conduct such valuations.

What is the difference between tax reporting valuations and financial reporting valuations?

The valuations performed for financial reporting would not be appropriate for tax reporting purposes. The standard of value within tax and compliance valuations is fair market value as opposed to fair value under financial reporting purposes.
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