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Preface: You see [value] more creatively when you look at the world with other leaders who have different backgrounds and experiences. — Bill Taylor from The Best Leaders See Things That Others Don’t.

Business Valuation for Transition – Market Approach

A market approach to valuation is an analysis process that estimates a business value with a comparison of a business interest being analyzed to similar transactions of businesses that have sold on the marketplace with comparable company characteristics. The two primary methods of the market approach to valuation are guideline public companies and guideline transactions such as BIZCOMPS. BIZCOMPS is a detailed online database of private small company transactions. It is the most thorough and accurate resource for financial details on “Main Street” private small businesses.

With market comparisons, a valuation analyst can contrast similar small business transactions with a seller’s discretionary earnings or sales multiples. The seller’s discretionary earnings are a business income before taxes, non-cash expenses such as depreciation, non-operating expenses such as loan interest, and extraordinary expenses and owner’s salaries. The seller’s discretionary earnings differ from EBITDA in that it also adds back the owner’s salaries and certain discretionary expenses on the profit and loss statement.

To estimate a business value with seller discretionary income, a valuation analyst must first calculate the obtain an accurate seller discretionary income amount. Once having completed that math, the analyst then analyzes the valuation metrics from a guideline market comparison to find the best comparable for a business valuation estimate.

The sellers’ discretionary earnings are then multiplied by the corresponding multiple or average multiple for an estimate of value. For example, a business with seller discretionary earnings of $400,000 including net profits of $125,000, depreciation expense of $175,000, owner’s salary of $75,000, and interest of $25,000 may have a multiple of Seller discretionary earnings of 2.5. The value estimate would therefore be one million dollars in that example. Multiples for sellers’ discretionary earnings vary from both industries and businesses. The market approach is often a guide for valuation reasonableness when using an asset or income approach to valuation.

A multiple-of-sales approach is more straightforward with a calculation of a business value based solely on top-line sales revenues. For example, a transaction database may show a business value ranging from .40 to .55 of topline sales. So a valuation analyst would look first at the range of sale multiples represented for the industry and then select the most alike transactions to zoom in and calculate a value estimate.

A business with sales of $2,500,000 with a .42 sales multiple would be worth an estimated $1,050,000 from a marketplace approach estimate for instance. Market approaches are facilitated with standard valuation libraries. Any business valuation that does not include at least consideration of market transactions is increasingly subject to analysts’ bias and opinion and therefore more subject to error. An example is a rule of thumb calculation that a business is worth a certain multiple of sales.

Each business is unique, and a proper estimate of business value will incorporate and consider the uniqueness of a business in a value estimate. For instance, if someone gives a valuator a businesses topline sales and net profits a marketplace analyst an estimate may be possible, but market approaches don’t provide all key characteristics such as key customers, location, networks, and other competitive edge approaches that are safeguards to premiums or discounts on valuation estimates.

A valuation analyst also makes a prophecy of sorts about the future value of the future cash flows of a business when preparing an estimate of value whether a calculation of value or a conclusion of value. Again, no two businesses are identical. Therefore, while using market approaches as a quantitative process as a check of reasonableness with a small business transaction is highly advised, more importantly, is the qualitative and cumulative sage expertise, knowledge, and experience of the valuation analyst preparing the valuation estimate.

….to be continued….

 

Preface : Businessmen shepherd net-worth. Teachers shepherd self-worth.                -Anonymous

Business Valuations For Transition

For more than two decades Andrew had been spending his time as a small business owner. His side hobby of auto repair gigs had grown into a full-scale auto service center with a twelve-bay garage including space for RVs and large truck service and repairs. Andrews Auto had a team of 10 employees that far exceeded his initial vision of helping keep vehicles in great driving condition in his community.

Most days, Andrew watched his management team keep the business running like a Swiss watch while he drove around town running errands and talking with locals at the café. He enjoyed every moment of the opportunity to grow his business and now is thinking about his approaching retirement. That includes cashing in on his cumulative years of toiling to keep up with his business opportunities and growing his business investment. Andrew decided to advertise his business on the marketplace for three million dollars himself. After all, he built the business, so why would he need someone to help him sell it?

Following several months of waiting for an interested bid, a potentially interested party texted him with an offer for $1.0m. The bidder said his offer was fair based on Andrews Auto’s annual seller’s discretionary earnings of $500,000. Andrew never betted that selling a business could be this challenging.

All too often small business owners don’t obtain the experience of a trusted advisor when beginning the process of selling their business, resulting in problematic and unrealistic expectations. This can create unnecessary challenges in the process for both sellers and buyers. Secondly, often small business owners don’t know what they don’t know about the business transitional process, and proper preparation for a business sale or transition is paramount for a truly successful transaction for any business owner.

Planning the sale of a business should begin years in advance. Starting with the end in mind is the best advice. Pastors would agree too, that is a best practices policy for life. Usually, business planning involves benchmarking the estimated value of your enterprise. Well-written attorney-prepared buy | sell agreements have periodic business valuation requirements to set benchmark valuation precedents for owners. The purpose of business valuation as a process to assign economic value to an enterprise is to give business owners an objective estimate of value for their enterprise for whatever the intended purpose.

When your business needs a valuation estimate, whether for benchmarking value or planning a transition, there are three approaches to consider. 1) Asset-based approach. 2) Market-based approach. 3) Income-based approach. An expert business valuation will include at least two of the three valuation approaches in the valuation analysis and estimate process.

An asset-based approach adds up all the assets of the company on its balance sheet. For a going concern-based approach, where the business is to continue as an operating business this valuation calculation includes adding up all assets and subtracting liabilities. A liquidation asset-based approach is used when a business owner is looking to liquidate the assets of a business, whether at a public auction or a liquidator. Asset-based approaches usually result in greatest bargain level business value of the three approaches.

….to be continued…

 

Preface: People rarely succeed unless they have fun in what they are doing.” -Dale Carnegie

Commonly Missed Business Tax Deductions

Many business taxpayers fail to deduct otherwise eligible business expenses or fail to fully deduct qualifying business expenses. As a result, millions of dollars are overpaid to the Internal Revenue Service every year. Below is a listing of commonly missed deductions or deductions that you may not be fully utilizing. You may wish to carefully examine your records to determine if you may be missing any of these deductions.

Home Office Deduction: If you use part of your home as a home office, you may be entitled to deduct expenses related to the home office based on the percentage of square footage the home office occupies. Related expenses include mortgage interest, property taxes, utilities, and repairs, etc.
General Business Expenses: If you use your personal funds for business expenses such as office supplies, these are qualifying business expenses, which you may deduct.

Imputed Interest on Shareholder Loans: If you have loaned money to your business, you are required to charge interest on the loan or interest will be imputed to you. While you are required to report the interest as income on your personal return, your business is permitted a deduction for the interest paid. If any of the interest amount is improperly characterized as wage income to you, your business may be overstating its employment tax liability. By recharacterizing these amounts as interest expense, your business may be able to reduce its employment taxes and possibly obtain a refund.

Meal Expenses: Business meal expenses that you pay with your personal funds may qualify as a business deduction, subject to limitations.
Personal Assets Converted to Business Use: If you have contributed personal assets, such as a computer, the fair market value of these assets qualify as a business deduction, subject to depreciation limitations, beginning with the date of conversion.

Self-Employed Health Insurance: As a self-employed taxpayer, you may deduct 100 percent of health insurance premiums for you, your spouse and your children. The deduction may also include eligible long-term care premiums for a long-term care insurance contract.
Communications Expenses: Expenses related to the business use of your personal telephones, cellular phones, and internet connections may be deducted.

Automobile Expenses: Mileage and other related automobile expenses may be deducted when your personal vehicle is used for business purposes.
Note that miscellaneous itemized deductions that are subject to the two-percent-of-AGI limit are temporarily repealed for tax years beginning after 2017, and before 2026.

If after examining your records you feel that you have missed some qualifying business deductions or if you have any questions about your business deductions or whether certain expenses qualify as business deductions, please contact our office at your convenience.

Happy New Years

As the new calendar page arrives again, and we look towards 2023, we would like to express our sincerest appreciation for the opportunities you have given us to serve the business community. Thank you!  Wishing you all the best for the New Year.

We greatly appreciate the opportunity to serve the business community. Thank you for giving us that opportunity.

Wishing you and yours a Merry Christmas & Happy, Healthy, New Year from Sauder & Stoltzfus.

Preface: A car for every purse and purpose. -Alfred Sloan

2022 Tax Planning: Vehicle Depreciation and Deductions 

 In general, if you use vehicles in pursuit of a trade or business, you can deduct the ordinary and necessary expenses incurred while operating the vehicle. Taxpayers may use either the standard mileage rate method or the actual cost method to recover vehicle costs.

For purposes of these deductions, an “automobile” includes a passenger vehicle, van, pickup or panel truck.

 Standard mileage rate vs. actual cost method. In lieu of proving the actual costs of operating an automobile, self-employed individuals may compute the deductible costs for their business use of an auto using a standard mileage rate. The standard mileage rate may also be used to reimburse employees who use their own car for business. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of actual costs. The 2022 standard mileage rate is 58.5 cents per mile and for 2021 is 56 cents per mile for business. Alternatively, if you use the actual cost method, you may take deductions for depreciation, lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires, and parking fees.

 Substantiation. Proper recordkeeping is critical. The recordkeeping requirements vary depending upon which method you use. If you use the standard mileage rate, you should keep a daily log showing the miles traveled, destination and business purpose. Recordkeeping under the actual cost method is somewhat more onerous. You should also keep a mileage log if you use the actual cost method to establish business use percentage. In addition, you must keep receipts, invoices, and other documentation to verify expenses. Finally, you must be able to prove the original cost of the vehicle and the date it was placed in service for business use to claim depreciation.

 Personal vs. business miles. Regardless of the method used, if the vehicle is driven for personal as well as business purposes, only expenses or mileage attributable to the percentage of business use are deductible. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction. You also have the option of using the standard mileage rate, based on miles of business use for the year times the prescribed rate.

 Automobile depreciation and annual limits. The depreciation deductions for passenger automobiles are subject to annual limitations for the year the taxpayer places the passenger automobile in service and for each succeeding year.

Bonus depreciation. A taxpayer who acquires a business vehicle after September 27, 2017 and places the vehicle in service before 2023 is entitled to a 100 percent bonus depreciation deduction in the placed-in-service year. Under the luxury car rules, the actual bonus deduction for the year is limited to the first-year cap (e.g., $19,200 for a vehicle placed in service in 2022). However, without adopting an IRS safe harbor, no depreciation deductions may be claimed in any of remaining years of the vehicle’s regular depreciation period. This is because the basis of the vehicle for purposes of computing depreciation during the remaining years is reduced to $0 as if the taxpayer had claimed the full 100 percent bonus deduction. The amount of the 100 percent bonus deduction in excess of the first-year cap is recovered at a specified rate per year beginning with the first year after the last year in the vehicle’s depreciation period ($6,460 for a vehicle placed in service in 2022). 

This computational “quirk” may be avoided by adopting the IRS safe harbor method of accounting in the first tax year after the placed-in-service year. Under the safe harbor, a taxpayer deducts the first-year depreciation limit ($19,200 for 2022) in the placed-in-service year. In each subsequent year of the depreciation period, the taxpayer claims the depreciation deduction allowed by applying the applicable depreciation table percentage for the year to the cost of the vehicle as reduced by the first-year limit. However, if the depreciation cap for the year is less than this amount, the deduction is limited to the depreciation cap.

 Section 179 deduction. A new or used vehicle may qualify for expensing under Code Sec. 179 in the tax year that it is placed in service if business use of the vehicle exceeds 50 percent. However, the sum of the section 179 expense deduction and regular first-year depreciation deduction (including any bonus depreciation) cannot exceed the applicable first-year depreciation cap for that vehicle.

 Certain heavy vehicles not subject to limits. Sport utility vehicles, trucks, and vans with a gross vehicle weight rating (GVWR) greater than 6,000 pounds are not subject to the annual depreciation caps imposed by the listed property luxury car rules because they are excluded from the definition of a passenger automobile. This can provide a tax break for buying new or used heavy vehicle that will be used over 50% in your business.

Electric plug-in motor vehicle credit. There are potential opportunities for taxpayers who purchase electric vehicles. A tax credit may be available in the year a taxpayer places a new qualified plug-in electric vehicle in service. The maximum credit is $7,500 and is reduced once a manufacturer sells 200,000 eligible vehicles for use in the United States. Eligible vehicles must satisfy several tests, including energy savings standards. The credit is generally a nonrefundable personal credit; however, any portion that is attributable to depreciable property is part of the general business credit.

If you would like to evaluate the business use of your vehicle(s) to provide guidance on how to maximize deductions, please call us at your earliest convenience to review your situation.

Preface: “That’s the thing about December: it goes by you in a flash. If you just close your eyes, it’s gone. And it’s like you were never there.” — Donal Ryan

Recordkeeping | Common Requirements for Personal Taxes

We previously explained the importance of keeping records so that your tax return can be properly prepared and so that claimed items can be backed up in the event of an audit. (Despite a popular misconception that the IRS Reform Act of 1998 shifted “the burden of proof” on audits to the IRS, the law does not relieve any taxpayer of the obligation to keep proper records to substantiate deductions and tax basis.) Here, we focus on common records that are needed in connection with taxes on your personal income.

You should keep records of expenses that can be claimed as itemized deductions. Thus, you should keep records of unreimbursed medical and dental expenses, including receipts showing the dates you paid them and receipts for transportation primarily for, and essential to, medical care; payments of state income tax including any Forms W-2 from employment and canceled checks of payments of state estimated tax and of any additional state tax paid with your return (which also should be retained); records and canceled checks showing interest payments on your home mortgage and payments of real estate and personal property taxes.

You also need records of charitable contributions. For cash contributions of any amount, keep a canceled check or a receipt from the charity showing the amount and date of the contribution. For a contribution of $250 or more, you need a written acknowledgment from the charity containing very specific information and you generally must get this before you file. Additional records are needed for contributions of property other than cash. If you perform services for a charity, keep records showing your out-of-pocket expenses. If you give clothing or household goods, you need proof that they are of “good or better” condition or they are not deductible at all.

You must keep records of stocks, mutual funds, bonds and other similar investment property. Retain information on how and when any such assets were acquired, including additional shares purchased by reinvesting dividends. For these items and other types of assets, you must keep track of your basis, which is used to measure your tax gain or loss when you sell an item. Basis is ordinarily your cost but is different for property acquired by gift or inheritance or in a divorce. It is especially important to keep records of the basis in your home, which you may not sell for several years. Records of sales also need to be kept, along with commissions and other selling charges.

If you have any questions about any of the matters in this letter or any particular transaction you are concerned with, please give us a call.

Preface: “I was at this restaurant. The sign said ‘Breakfast Anytime.’ So I ordered French Toast in the Renaissance.” – Steven Wright

2022 Tax Planning: Meals and Entertainment Expenses

Many businesses consider the occasional dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It’s easy to think of these entertainment costs as deductible business expenses. However, due to a recent change in the tax law, many of those expenses may not be deductible.

 Entertainment Expense Deduction Limited

 Congress has eliminated the deduction for most entertainment expenses paid or incurred after December 31, 2017. Entertainment includes fees or dues associated with any social, athletic, sporting club or organization. However, your company may still be able to deduct the cost of meals as a business expense if detailed substantiation and recordkeeping requirements are met.

 Business Meals

 As a general rule, your company can deduct 50 percent of the cost of meals as a business expense if the following requirements are met: 

• • • • the expense must be ordinary and necessary and paid in carrying on a trade or business;
      • the expense may not be lavish or extravagant;
      • the taxpayer or an employee must be present when the food or beverages are furnished;
      • food and beverages must be provided to the taxpayer or a business associate; and
      • if the food and beverages are provided during or at an entertainment activity, separate invoicing is required.

 The food or beverages must be provided to a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective. This definition is applied to employer-provided food or beverage expenses by considering employees as a type of business associate as well as to the deduction for expenses for meals provided by a taxpayer to both employees and non-employee business associates at the same event.

 Coronavirus (COVID-19) pandemic. Congress provides for the temporary allowance of 100% deduction for business meal food and beverage expenses provided by a restaurant that are paid or incurred in 2021 and 2022.

Special rule for per diem rates. For a taxpayer properly utilizing for meal expenses, the IRS provides a special rule that allows the taxpayer to treat the full meal portion of a per diem rate or allowance as being attributable to food or beverages from a restaurant beginning in 2021 and 2022.

 Invoicing. Food and beverage expenses deductibility and treatment depends on how invoiced. Food and beverage expenses include delivery fees, tips, and sale tax. For food or beverages provided at or during an entertainment activity, the amount charged for food or beverages on a bill, invoice, or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment, or must approximate the reasonable value of those items. However, if the invoices are not stated separately and no allocation can be made, the entire amount is nondeductible.

Please call our office and to discuss how your company’s typical meal and entertainment expenses fare under the new deduction rules and suggest changes to your meal and entertainment policies. We can also show you how to comply with the recordkeeping requirements.

Preface: “Life is either a daring adventure, or nothing at all” – Helen Keller

Can You Handle Travel Costs More Easily

As you likely have discovered, travel expenses are a stressing task for your company. Besides the cost of the actual travel, you also must navigate budgeting for travel costs that vary from destination to destination, the administrative hassle of tracking actual expenditures from employee-maintained records, paying directly for the expenses or providing employees with advances or reimbursements, and keeping track of which expenses are completely deductible (lodging and round-trip travel) and those that yield only a 50-percent deduction (meals while the employee is on travel status).

Fortunately, the IRS may be able to help you work out an alternative plan of action that puts strict limits on your travel expenses, encourages employees to be frugal, and involves a bare minimum of tax complications. In a nutshell, the plan involves paying employees a flat daily or per-diem rate for meals, incidental expenses, and lodging costs while they are out-of-town on company business.

If employees pay more for their meals and lodging than the per-diem rate, they must personally pay for the difference; if they pay less than the per-diem, they pocket the difference. Along with costs, recordkeeping is cut, too, if the per-diem rate does not exceed the per-diem rate that the federal government pays its employees traveling to the same destination as your employees. All employees need to do to substantiate the travel expenses for tax purposes and keep the per-diem payroll- and income tax-free, is to submit a written log of the time, place, and business purpose of the travel. Receipts and to-the-penny recordkeeping of actual travel expenses are not required.

Your business may deduct 100 percent of the lodging portion of the per-diem and 50 percent of the meals expense portion. However, Congress provides for the temporary allowance of 100% deduction for business meal food and beverage expenses provided by a restaurant that are paid or incurred in 2021 and 2022.

To make the per-diem program work, you need a list of the federal government’s per-diem reimbursement schedule, which varies year to year as well as locality to locality. We’ll be glad to make this schedule available to you, as well as full details on this trouble-free reimbursement plan.

A simpler version of the per-diem travel reimbursement program is available. Regardless of the actual government reimbursement rate for a particular locality within the lower 48 states, your company can reimburse travel to “low cost” travel destinations at one rate and use a higher rate for all “high cost” travel destinations. These so-called “high-low” rates are changed periodically.

Call us for the current list of high-cost areas available to you and work out a detailed guide that will help you control travel and recordkeeping costs without adversely affecting your deductions for employee travels.

Preface: “The question isn’t at what age I want to retire, it’s at what income.” -George Foreman

2022 Tax Planning: Benefits of Lowering Adjusted Gross Income

Planning to reduce your income can reduce your overall tax burden. Individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations. Saving for retirement and for future medical costs is an important way for an individual may achieve financial security and prepare to save for future expenses. This blog focuses on the background and tax benefits on reducing adjusted gross income by contributing to retirement plans, contributing to a health savings account, and opportunities for a student loan interest deduction.

 Traditional IRA. Any individual, regardless of whether or not covered under other qualified retirement plans, can establish an individual retirement account (IRA). Whether an individual is employed or self-employed, they may also take advantage of a variety of employer-sponsored retirement plans.

These options not only provide security for the future, but also may provide opportunities for current tax savings. Traditional IRAs allow an individual with earned income to make tax-deductible contributions to a savings plan under which the gains and earnings are not taxed until they are distributed.

 Contributions to a traditional IRA are generally deductible on the taxpayer’s individual income tax return, to the extent that they do not exceed the lesser of the individual’s compensation for the year or the maximum contribution limit for the year and subject to income limits. In addition, nondeductible contributions from after-tax income may be made to traditional IRAs.  

For 2022, total contributions to all of a taxpayer’s traditional and Roth IRAs cannot be more than the lesser of $6,000 ($7,000 if they are age 50 or older) or their taxable compensation for the year. The prior maximum age limitation of 70 ½ to contribute to an IRA ended effective for contributions after December 31, 2019.

 SEP Plan. A SEP is a type of IRA for small business owners or self-employed individuals. A SEP IRA allows the employer to make contributions to the accounts set up for employees. Self-employed individuals choosing a SEP must include all employees who satisfy the following requirements: at least 21 years of age; were employed during any three of the preceding five years; and earned at least $650 in the current year.

Contributions to a SEP plan are tax-deductible and earnings are not taxable until withdrawal. One advantage of the SEP IRA is the higher contribution limit. For 2022, employers can contribute the lesser of up to 25% of income (limited to $305,000) or $61,000.

SIMPLE Plan. Any employer that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. Self-employed individuals who received earned income from the taxpayer and leased employees are taken into account for purposes of the 100-employee limitation.

Employers must also make contributions whether or not an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. For 2022 an employee may defer up to $14,000. If the individual age 50 or over, there is a $3,000 catch up contribution allowed, for a total of $17,000.

Health Savings Account (HSA). Health savings accounts (HSAs) are available for individuals who have a high deductible health plan and may be funded by the individual or the individual’s employer.

The benefits of an HSA include: 

• • • • • • taxpayers can claim a tax deduction for contributions you or someone other than your employer make to your HSA,
          • contributions to your HSA made by your employer may be excludable from income, and
          • the contributions remain in your account until you use them.

 For 2022, the maximum contribution to an HSA is the lesser of: the annual deductible under the individual’s high deductible health plan; or $3,700 for an individual with self-only coverage and $7,400 for an individual with family coverage.

Student loan interest deduction. Interest paid by an individual taxpayer during the tax year on any qualified education loan is deductible from gross income in calculating adjusted gross income. The student loan must be incurred by the taxpayer solely to pay qualified higher education expenses. The maximum deductible amount of interest is $2,500, but the deduction is phased out or reduced based on the taxpayer’s modified adjusted gross income.

 If you would like to evaluate the tax advantages of retirement plans, health savings account, or education benefits with to your individual income tax situation, please contact us to review potential tax opportunities for you to reduce your 2022 taxable income or tax liability.