Tag Business Valuation

It’s a Great Time for Gifting – 8 Tax Facts to Consider

0 comments By TRMoore Filed in General, Tax Tagged with , , , May 17th, 2011 @ 9:52 am

With a still-sluggish economy and the depressed real estate values that remain, it’s an excellent time to consider a valuation on a closely held business interest for gifting to heirs and other family members. The two-year window under the current tax law that allows both gifting and generation-skipping transfer exemption limits up to $5 million, an opportunity for additional wealth transfer that hasn’t existed under previous tax laws. The IRS offers eight facts about tax on gifts:

  1. The gift tax applies when the value of the gifts you give a person other than your spouse exceeds the annual exclusion for the year. For 2010 and 2011, the annual exclusion is $13,000.
  2. Gift tax returns must be filed if you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
  3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
  4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
  5. The general rule is that any gift is a taxable gift. However, there are many exceptions, including:
    • Gifts that are not more than the annual exclusion for the calendar yea
    • Tuition or medical expenses you pay directly to a medical or educational institution for someon
    • Gifts to your spouse
    • Gifts to a political organization for its use
    • Gifts to charities
  6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.
  7. You must file a gift tax return on Form 709, if any of the following apply:
    • You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the yea
    • You and your spouse are splitting a gift
    • You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy or receive income from until some time in the future
    • You gave your spouse an interest in property that will terminate due to a future event
  8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

Contact us for more information.

It’s Complicated: Goodwill in Divorce Proceedings Provokes Much Conflict

0 comments By TRMoore Filed in General, Litigation & Forensic Accounting Tagged with , , , , April 19th, 2011 @ 9:49 am

by Bruce Knapp, CPA, ABV, CVA, CFF, Director of Litigation & Support Forensic Services, TR Moore & Company, A Doeren Mayhew Firm

When a divorce includes a private business interest, expect a battle. Value is in the eye of the beholder — and even trained appraisers rarely see eye-to-eye. Valuation discrepancies are most common when a business has intangible assets, such as customer lists, patents and goodwill. To complicate matters, there’s little consensus nationwide on how courts should divvy up intangibles.

A clear understanding of U.S. legal precedent and the theory underlying goodwill allocations can help divorcing spouses achieve equity. It’s not uncommon for judges to look to other jurisdictions for guidance — especially when comparable in-state case law is scarce. Moreover, choice of venue (when applicable) can have a material impact on asset distributions.

Slicing the Pie

Business value can be broken down into two pieces. First, tangible (or hard) assets include such items as cash, receivables and equipment. These items are typically recorded on a company’s balance sheet. The difference between tangible assets and liabilities (such as payables and bank debt) is called net tangible value.

The second component is intangible value, which equals the difference between fair market value and net tangible value. Often, divorce courts lump all intangible value into a catchall phrase called “goodwill.” Goodwill may include other identifiable intangible assets, such as patents, customer lists, brands, leases and proprietary software.

3 Divisions of Goodwill

Generally, U.S. courts divide goodwill three different ways:

  1. Majority view. More than half of the states differentiate between enterprise and personal goodwill (see below). Personal goodwill is specifically excluded from the marital estate, but enterprise goodwill is included.
  2. All-inclusive view. The second most common treatment is to include all business value in the marital estate. No distinction is made between personal and enterprise goodwill.
  3. Minority view. Least common is an approach that excludes all goodwill from the marital estate. Here, appraisers separate value into tangible and intangible components, but they don’t analyze it further.

A handful of states have yet to take sides, and others have made inconsistent rulings on goodwill. Although goodwill is generally associated with professional practices, some states have ruled that other types of businesses — including auto dealerships and construction contractors — also possess personal and enterprise goodwill.

Digging Deeper

Many jurisdictions break down intangible value into two pieces. Enterprise (or business) goodwill is linked to the business itself. Companies with established brand names, accessible locations and an assembled workforce likely possess enterprise goodwill.

Conversely, personal goodwill is inextricably linked to the business owner and can’t easily be transferred to a buyer. Personal goodwill is a function of an owner’s reputation, skills and personal efforts.

The logic behind excluding personal goodwill is that it represents a spouse’s future earnings capacity. Some courts have determined it’s unfair to credit a nonmonied spouse for a company’s personal goodwill and then award maintenance payments based on future earnings.

Calling an Appraiser

The only real certainty regarding goodwill is that, when a private business interest is at stake, a valuation professional is needed. Do-it-yourself appraisals present a minefield of potential errors. One common mistake is automatically equating net book value with net tangible value. (An asset’s book value doesn’t always equal fair market value.)

For example, companies that use accelerated depreciation methods might undervalue equipment. Or a building might be worth less than book value due to a depressed real estate market. Parties need an experienced appraiser to analyze value and break it down into the necessary components. Moreover, judges often appreciate a thorough written report from an objective professional.

Leading Litigation & Support Forensic Services for TR Moore & Company parent firm Doeren Mayhew, Bruce Knapp offers more than 25 years experience in accounting, auditing and investigative support to assist Houston litigants.  Contact us for more information.

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What You Need to Know About Estate Taxes

0 comments By TRMoore Filed in General, Tax Tagged with , , February 14th, 2011 @ 2:48 pm

If you are handling the disposition of an estate, you are probably already aware that there was an unexpected reprieve from taxes on the estates of those who died in 2010. But the estate tax is back in force this year, with estates greater than $5 million set to be taxed at the 35 percent rate.

While taxpayers surely are relieved there was no rate increase, they aren’t feeling the love for the tax-free threshold, with more than 60 percent of respondents in a recent CNBC poll voting for a threshold increase to $10 million or more. With the terms only temporary, the matter will be up for debate – and potential tax rate increases – again in two years.

Here is a rundown on some of the complexities related to the tax from the Texas Society of CPAs: 

1-Year Hiatus

Congress allowed the federal estate tax law to expire for 2010, meaning no taxes were due on the estates of anyone who died in 2010. That was good news for the families of numerous wealthy people—but it also meant many families at the more modest end of the income scale did not have to deal with estate taxes. In addition, the executors of estates of those who died last year did not have to file a tax return for the decedent’s estate with the Internal Revenue Service.

The Tax Burden Returns

On Dec. 17, 2010, President Obama signed into law the Tax Relief Act of 2010. In this bill, Congress reinstated the estate tax for decedents dying after Dec. 31, 2009. The new rules are only temporary and will sunset on Dec. 31, 2012.  Executors of deceased taxpayers must pay taxes on an estate greater than $5 million (there are considerations for surviving spouses, which should be discussed with your CPA). The estate tax will be based on the new 35 percent top rate.

In light of the rules that were in effect prior to the act, Congress afforded executors of decedents dying after Dec. 31, 2009, and before Jan. 1, 2011—such as the Steinbrenner Estate—the option to elect to not come under this newly revived estate tax. In this case, the estate would pay no estate tax as originally described above, but beneficiaries would be subject to the modified carryover basis rules.

Be Aware of All the Assets in Your Estate

Many don’t understand what kinds of assets make up their estates. There is a misconception that an estate consists solely of cash in the bank. You may be in for an unpleasant surprise, however, if you don’t consider the current value of all the assets in your estate. A parent who did not have a lot of cash on hand may have owned a home that has increased substantially in value over the years, especially if it’s located in an area with high or rising property values. Add in the value of a retirement account savings or other assets and the total may quickly jump to more than $5 million. That may also be the case with a small business that family members built from scratch into a thriving enterprise, especially if the company owns valuable property or equipment.  

In addition, while an estate may not be subject to a federal estate tax, the estate’s executor may still have to pay an estate tax at the state level, depending upon the appropriate state’s laws. Your CPA can help you in the accounting and valuation of your estate to determine whether your situation calls for undertaking some tax-savvy estate planning for both federal and state purposes. 

Estate taxes are complicated, so it’s wise to consult with a CPA about long-term estate plans. Contact us for more information.

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