Is it time to get your business revalued?
The Tax Cuts and Jobs Act changes how businesses are valued. The new tax law affects each business differently and what was a reality even one year ago may no longer be true.
Is your company worth more today than in 2017?
Many businesses are worth more now that the new tax law is in place. However, company valuations are fact and circumstance specific. Your company’s valuation in light of the new law changes depends on your company structure, industry, and capital expenditures.
Here are 3 reasons you need to revalue your business.
Pass-Thru Entity vs. C-Corp?
The magnitude of the tax cuts depends upon your business structure – Pass-Thru Entity vs. C-Corp.
Business income generated as pass-thru entities (such as LLCs, S-Corps, and partnerships) passes through to an individual and is taxed at the individual’s personal tax rate. Under the new tax law, the top marginal individual tax rate decreases from 39.6% to 37.0%.
Additionally, you may benefit from a Qualified Business Income (“QBI”) deduction of 20%, further reducing your effective tax rate to 29.6% (37% x (1-20%)). Keep in mind, however, these provisions are subject to a host of limitations and are temporary, sunsetting after December 31, 2025.
The bonus for C-Corps is that the tax rate is lowered from 35% to 21%, permanently. Lower tax rates typically mean more cash flow, which often means higher values.
Depending upon your company’s legal structure and what industry you operate in, this change to tax rates means your company is likely to be worth more compared to 2017. It’s time to get your business revalued.
Personal Services vs. Product-Based
If you own a services company where the principal asset of the business is the reputation or skill of one or more of your employees, you may be excluded from the 20% QBI deduction. These types of businesses include healthcare, law, accounting, and financial services.
However, there are exceptions, mainly for those operating in the architecture or engineering fields.
Additionally, there are certain income thresholds that must be met ($157.5 thousand for a single taxpayer; $315.0 thousand for married) before an individual is ineligible for the QBI deduction.
It’s hard to say without deeper investigation how this affects the value of your business. You are wise to bring in a professional to revalue your business, giving you advice on how to grow that value in view of the new laws.
Investing in Capital Equipment?
If your company invests heavily in capital equipment, qualifying equipment is now 100% deductible if placed in service between September 28, 2017, and December 31, 2022.
This new ability to depreciate equipment quickly typically has an upward effect on a company’s value.
If your company plans large capital investments over the next few years, your tax burden may decrease, increasing cash flow and making your business worth more. However, keep in mind this bonus depreciation benefit phases out between 2023 and 2026 and sunsets in 2027.
The 2018 tax year is the first under the Tax Cuts and Jobs Act. If you are wondering how your company structure, your industry, and services, or your capital expenditures affect the value of your company, it’s time to re-value your business.
How much is it worth today?
If you need help understanding where you are today and if you’re going in the right direction to create value for your company, Quist Valuation can help. Let’s set a time for a free 30-minute consultation. We can discuss the specifics of your business and identify areas to focus on as you progress along your exit plan.
Schedule your free 30-minute consultation here.
