Businesses eventually require a business appraisal to determine their value. The IRS has specific valuation guidelines for taxing purposes.
Certified Business Valuation for IRS Purposes
All businesses eventually require a business appraisal to determine their current economic value. Often, such valuations are conducted at the onset of a financing or tax event within the business lifecycle. The IRS has specific business valuation guidelines for taxing purposes.
A business valuation reflects the current economic worth of a business. Although the appraisal approach may vary among evaluators and industries, the factors included in such an analysis tend to be the same. Overall, the financial health of a business is calculated by assessing its team, assets, earnings, growth, and losses within the context of its specific industry.
Many companies requiring a valuation, however, are privately owned. Unlike those publicly traded in the stock market, these companies do not publicize market information about their businesses for all to see. The Internal Revenue Service (IRS), thus, has an established set of guidelines that must be consulted by expert appraisers while evaluating the worth of these businesses.
The Internal Revenue Manual (IRM) refers to the guidelines created by the IRS and used by experts to properly appraise a privately owned company. These recommendations must be adhered to by a qualified appraiser during various valuations, which can then be utilized for tax filing purposes.
For example, business owners planning for succession will require a valuation, following the IRM guidelines, to determine what their tax liability would look like for estate tax planning needs. This is important because the IRS audits a portion of the estate and gift tax returns filed every year involving the valuation of privately held assets. Obtaining a business valuation service from an expert appraiser like BAF|G will be critical to strategizing business opportunities, complying with IRS requirements, and navigating a potential tax audit.
Additionally, individuals interested in giving privately held company stock to charity will also be required by the IRS to obtain a valuation following IRM standards. This is because the donation must be assessed at its fair market value to determine the charitable deduction that the individual can expect to be deducted from their taxable income.
Regardless of the particular reason, the IRS will require you to obtain a qualified appraisal that follows Section 4.84.4 Business Valuation Guidelines in the IRM. That specific section provides the requirements that expert appraisers like BAF|G will follow when appraising your privately owned company.
There are a few different ways that valuations can be conducted while complying with the requirements suggested by the IRS. Here is some insight into the general process that qualified appraisers tend to follow while conducting a valuation in accordance with the guidelines provided by the IRS:
1. Analyze specific information about your company
Appraisers will first review specific pieces of information relevant to your privately owned company. For example, the value of the business’s assets and liabilities may be analyzed. Additionally, any revenue, profits, or income gained during the time period of interest will be considered. Finally, the valuator will likely assess the value of the business by considering the market prices of similar assets or businesses that have been recently sold or are in the process of selling.
2. Ensure complete compliance with IRS guidelines
Valuations of privately owned companies produced by appraisers for tax filing purposes must follow the requirements laid out by the IRS in the IRM Section 4.48.4. It is especially important that you obtain a valuation by a qualified expert like BAF|G to ensure that the guidelines are adhered to. Otherwise, valuators will be required to justify any departures made from such requirements, which might delay the time in which your filing is processed by the IRS.
Additionally, appraisals must meet other IRS requirements set out by the Internal Revenue Code (IRC) Regulations.
3. Include relevant, personal details
Qualified appraisers will be expected to include relevant details — like a business description and terms of sale — during valuations, so be expected to provide such information to your appraiser to ensure an effective assessment occurs.
Privately owned businesses face a variety of scenarios that impact their growth, finances, and success. Regardless of how your particular business is faring, understanding its true value and worth can be extremely beneficial and needed when performed for a purpose that results in tax filing.
For example, appraisal information of your privately owned business will be needed when disclosing charitable contributions made above $5,000 in the IRS gift tax Form 709. Additionally, you might also need the valuation when completing the Schedule F estate tax form 706 to establish an estate.
The IRS expects your appraiser to have earned a recognized designation from an accredited institution like the National Association of Certified Valuators and Analysts® (NACVA®). Thus, be sure to seek an appraisal from a qualified expert like those employed by BAF|G with the CVA designation so that such certification can also be demonstrated in your filing.
Whatever the reason for your business valuation, BAF|G is ready to discuss your situation and our business appraisal services and costs.