News & Articles

Myths and Truths about Business Valuation

Posted on Thu, May 16, 2019

The business valuation profession has grown rapidly since 1980. Over the decades, it has developed from a rudimentary process into a highly sophisticated mix of art and science to determine the value of a business or business interest. However, many business owners and investors fail to understand the valuation process and its results. Here are some common business valuation myths and the underlying truths.

Myth: You appraised the "fair market value" of my business. When I sell my business interest, this is the price I will receive.

Truth: Fair market value (FMV) is different from a transactional (or strategic) value. FMV is hypothetical. If you look at the definition, FMV requires consideration of the universe of hypothetical buyers and sellers. The resulting value determination can be looked at as a "most likely" value given the hypothetical considerations. A transaction value, on the other hand, is a verifiable amount, a price at which the business actually changes hands and not an estimate of value that is the result of FMV. Transactional value may be significantly higher (or lower) than fair market value, depending on the circumstances.

Myth: As a business owner, I have the best idea of what my business is worth.

Truth: While the business owner might know the most about their business, that knowledge alone isn't enough to qualify the owner to value the business. Valuation has developed into a profession with accreditations, standards, and professionals with experience and knowledge in how to determine the value of a business. The valuation professional also is an objective third-party. Business owners tend to view their businesses differently than outsiders -- often through "rose-colored" glasses. Owners need to understand how outsiders view the business -- because it's hypothetical investors that determine FMV.

Myth: If a business is worth $1 million, my 10 percent interest should be worth $100,000.

Truth: Owning a minority (or less than controlling) interest in a business diminishes the interest's value from the pro rata value of the entire business. A minority interest cannot determine policy, set compensation for officers and other owners, or decide when and whether to sell the business or significant assets of a business. There are many other items that cannot be controlled by a minority owner. The diminished value can be materially less than the pro rata value, depending on the facts and circumstances.

Myth: The owner's contributions to a business enhance the value of the business.

Truth: An owner's contributions often enhance the value of a business, but there's a major exception. Owners may possess talents, relationships or other intangible assets -- often referred to as "personal goodwill" -- that cannot be transferred to buyers. Owners who contribute personal goodwill diminish the value of the business to an unrelated party. For example, if the owner has contacts with long-term customers that are not likely to transfer to a new owner, the business will likely lose those customers when the current owner leaves the business. That, of course, will reduce the value of the business.

Myth: Value is value, so I can use a valuation report for multiple purposes. For example, I could use a report that is prepared for estate planning purposes to get a loan, settle a divorce or support value on a gift tax return.

Truth: A business valuation is prepared for a specific business as of a specific date and for a specific purpose. If any of those parameters change, the valuation is no longer valid. Different purposes for a valuation might require a different standard or basis of value. For example, the valuation of a minority interest for gifting purposes cannot be used to determine the asking price of the business when the owner wants to sell the entire business two years later. It's important that the user of a valuation report understand its use limitations.

To attain a better understanding of business valuation, owners and investors should discuss the valuation process and various options with an EHTC appraisal professional. Please contact Erik Olson at ErikO@ehtc.com or by calling (616) 575-3482.

Read More

Tags: Valuation, Business Valuation, Business Owner

IRS Announces Changes for Personal Use of Employer-Provided Vehicles

Posted on Tue, May 14, 2019

The free use of a company car is one of the best perks an employee may receive as part of a compensation package. But the benefit to the employee isn't completely "free" under current tax law. Essentially, personal use of a company car is treated as a taxable noncash fringe benefit, subject to income tax obligations.

Read More

Tags: Vehicle, IRS, Tax Cuts and Jobs Act (TCJA)

Handle with Care: The Nanny Tax Rules

Posted on Wed, May 01, 2019

When you hire a nanny, housekeeper or other domestic worker, pay close attention to the tax rules.

Read More

Tags: Independent Contractor, Domestic Workers

Master the Fundamentals of Estate Planning

Posted on Mon, Apr 29, 2019

For many people, mapping out an estate game plan is something they intend to think about later. But too often, later never comes.

Read More

Exploring the Cashless Movement in Retail

Posted on Fri, Apr 26, 2019

Cash as a form of legal tender isn't yet as obsolete as 8-track tapes and VCRs. But it's definitely less popular with certain demographic groups than others.

Read More

Understanding IRS Audit Guidance

Posted on Wed, Apr 24, 2019

IRS examiners usually do their homework before meeting with taxpayers and their professional representatives. This includes reviewing any relevant Audit Techniques Guides (ATGs) that typically focus on a specific industry or audit-prone business transaction.

Read More

Tags: Audit, IRS Audit, IRS

Medical Costs: Can I Really Get a Tax Break for That?

Posted on Mon, Apr 22, 2019

It's difficult for many people to write off medical expenses because of the limits imposed under the tax laws. But you may qualify by including every expense allowed. Some of the qualified procedures may surprise you.

ELIGIBLE

NOT ELIGIBLE

A weight-loss program undertaken at a physician's direction to treat obesity or a condition such as heart disease. A weight-loss program to maintain your appearance. Meal replacements, diet foods and supplements that are substitutes for the food that you would normally consume.
Treatment at a drug or alcohol clinic. Smoking-cessation program and prescribed drugs for nicotine withdrawal. Trips your doctor recommends to rest or improve your morale
Acupuncture Marriage counseling
Dentures, hearing aids and orthopedic shoes. Household help, even if recommended by a doctor.
Admission and transportation to a medical conference if the conference concerns the chronic illness of you, your spouse, or a dependent. (Meals and lodging aren't deductible.) The collection and storage of DNA, unless you can show how DNA will be used for diagnostic testing. 
Lamaze classes for a mother-to-be. Maternity clothes.
Teeth cleaning and orthodontia Teeth bleaching and toothpaste
A wig purchased on physician's advice for the mental health of a patient bald from disease. Hair transplants
Contact lenses and peripheral materials as saline solution and enzyme cleaner. Retin-A for wrinkles
Nursing services at home or a care facility, including giving medication, changing dressings, bathing and grooming. Nursing services for a normal, healthy baby. (But you might be able to take a credit for child-care expenses.)

For example, most insurance plans won't cover laser eye surgery, such as radial keratotomy or "Lasik," because they consider it a cosmetic procedure. But it generally qualifies for a medical deduction and as an expense in a flexible spending account. (The IRS used to disallow Lasik as a deductible medical expense.) With the cost running into the thousands in most parts of the country, it's a considerable outlay. 

As with most tax laws, the medical rules can be tricky. You can't deduct over-the-counter vitamins but the U.S. Tax Court has ruled that medically prescribed vitamins to treat a specific condition are allowed.

There are also many exceptions to the general laws. For instance, you can't write off the cost of unnecessary cosmetic surgery to improve your appearance. That generally means no face lifts, electrolysis or liposuction. But you can deduct cosmetic surgery that's needed to improve a deformity directly related to a congenital abnormality, an injury from an accident, or a disfiguring disease.

A list of some other expenses that are eligible or ineligible for tax breaks appears in the right-hand chart. Here's a rundown of the basic rules:

Flexible spending accounts (FSAs). These tax-advantaged accounts generally have a "use-it-or-lose-it" feature on money left at the end of the year. So plan to empty your account by buying eyeglasses, filling prescriptions, getting a dental checkup or spending money on the eligible items listed in the chart. Note: Some FSAs allow participants an extra two-and-a-half-month grace period to use up the money in accounts if the employer properly amends its plan.

 

Medical deduction. Medical and dental expenses that are not reimbursed by insurance are deductible to the extent your annual total exceeds 10% of your adjusted gross income in 2019 (up from 7.5% in 2018). This can be a difficult threshold for many taxpayers to meet. To qualify for medical deductions, you must also itemize. 

When adding up your medical costs, don't forget the cost of traveling to your doctor or medical facility for treatment. If you go by car, you can deduct a flat rate, adjusted by the IRS each year, or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs. 

With either the actual costs or the cents-per-mile method, you can add in the amounts paid for parking and tolls. If you must travel out of town for medical treatment, you may also qualify to write off some of the cost.

Each year, take a look at your medical expenses. If you are close to — or exceed the threshold — you may want to get as many expenses as possible into this year. Otherwise, you may as well postpone elective expenses until next year when you have another shot at a deduction.

Read More

Tags: FSA, Tax Break, Medical

Navigate the Tax Rules for Boats and RVs

Posted on Mon, Apr 08, 2019

Will you be cruising the waters on your boat or camping out in your RV this year? Besides the pleasure you can enjoy through your personal property, you may also be eligible for tax breaks, if certain requirements are met.

Following is a brief rundown of four prime tax-saving opportunities.

1. Chartering activities. It's common for some boat owners to charter out their vessels for sightseeing or fishing excursions when they're not being used personally. In other words, this becomes a sideline business that allows you to recoup some of your expenses.

Notably, you can use expenses to offset the taxable income from chartering activities, including the cost of fuel, repairs, insurance, supplies, equipment, mooring and storage, and even fishing gear or binoculars. Plus, you're entitled to a generous depreciation allowance for the vessel itself.

Of course, your deductions are based on the percentage of boat use that's business-related. For example, if you charter out the boat 50% of the time, you can deduct 50% of the expenses.

Finally, be aware that you could run into troubled tax waters if the activity is treated as a hobby, rather than a business. Under the Tax Cuts and Jobs Act (TCJA), hobby expenses are generally disallowed for 2018-2025. Also, a business operation may trigger other tax consequences (for example, self-employment tax for a sole proprietor).

2. Mortgage interest. Typically, you can deduct mortgage interest on a qualified residence, like the main place where you live, but you're also entitled to interest deductions on a second home, like a vacation home. Surprisingly, the "residence" can also be a boat or a RV.

To qualify for this tax break under the tax code, the boat or RV must have sleeping, cooking and toilet facilities. So, if your boat has a galley, sleeping quarters and a head, you should be in the clear. You can't just barbecue on a boat's deck or throw a sleeping bag down below. Most RVs have the requisite facilities for this deduction.

Keep in mind that the TCJA imposes new limits on mortgage interest deductions for itemizers. It lowers the threshold for new acquisition debt from $1 million to $750,000, but prior loans are grandfathered. It also generally eliminates the deduction for home equity debt.

3. Charitable donations. Maybe you want to upgrade your boat or RV or your passion for boating or camping is waning. In any event, you might decide to donate the boat or vehicle to charity. Assuming certain requirements are met and you itemize deductions, this could provide a tax windfall.

As a general rule, you can deduct the current fair market value (FMV) of the boat or RV on the date of the donation. For instance, if you bought the RV for $80,000 years ago and it's now worth $50,000, you deduct $50,000 on your personal return.

But don't leave matters to chance. Obtain an appraisal from an independent professional. An appraisal is required anyway for property donations above $5,000.

Other special rules may come into play. For instance, the charity must use the boat or RV to further its tax-exempt function. Deal with a qualified charitable organization that is experienced with these types of donations.

4. Sales tax. Depending on your situation, you may be able to deduct the sales tax you pay when you purchase a boat or RV, although the rules have been complicated by the TCJA.

Previously, you could deduct all of your state and local property taxes, plus either your state and local income tax or sales tax. But now the total annual deduction for state and local tax (SALT) payments is limited to $10,000 for 2018-2025.

If you opt to write off sales tax instead of income tax as part of your annual SALT deduction, be aware that you can use either the actual tax paid, based on records, or an amount from a convenient IRS table. Generally, the actual expense method will produce a bigger deduction. Caveat: If you choose the table amount, you can add on sales tax from certain "big-ticket items" — like boats and vehicles!

To Summarize

These are just four ways you may benefit tax-wise from boats or RVs. At other times, you might use the property as transportation for hire or even claim home office deductions if you qualify under the strict letter of the law. Moral of the story: Be aware of all the tax-saving possibilities for these prized possessions.

Read More

Tags: Sales Tax, Tax Credit, Charitable Donations, Mortgage

Cloud Today - Work Anywhere from Everywhere

Posted on Mon, Apr 01, 2019

Looking for something to do on Wednesday, April 10th? Head over to Founders Brewing Company (235 Grandville Avenue SW, Grand Rapids, MI) from 3:00 - 6:30pm and learn about The Cloud and Software Defined Networks (SD WAN). Hosted by NuWave Technology Partners, Cisco, Meraki and the Small Business Association of Michigan and featuring a panel of technologist and visionaries.

Read More

Tags: Software Defined Networks (SD WAN), NuWave Technology Partners, Small Business Association of Michigan, Cloud, Cisco, Meraki

Technology May Help Solve Your Staffing Needs

Posted on Fri, Mar 29, 2019

When you think of "crowdsourcing," you probably think about people trying to raise money for a charitable purpose from friends, acquaintances and like-minded people on the Internet. But in the world of recruiting, crowdsourcing has now caught on in a big way.  

Read More

Tags: Employers, Technology, Recruiting, Artificial Intelligence (AI)