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Monthly Archives: June 2016

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Discretionary Expenses in Business Valuations

Posted in Business Valuation, on Jun 2016, By: Mark S. Gottlieb

(Reading time: Under 2 minutes) In an episode of the critically acclaimed sitcom, Arrested Development, aspiring magician and underachieving employee of the Bluth family business, G.O.B Bluth, tells his brother, Michael, “I figured out a way to make money while I’m working.” Michael, the work-oriented and responsible Bluth brother, replies, “But that is what we call working.” G.O.B. rarely performs work that adds to the value of the business, but, as a member of the Bluth family and officer of the Bluth Company, he is on the company payroll. His salary is an example of a discretionary expense that can affect the understanding of the company’s value. Business owners typically have a fair amount of flexibility to choose how they compensate themselves and their officers. The IRS mandates that the officers of a corporation, including the CEO, president, vice president, and any other shareholder employees, must be paid a “reasonable compensation” for their labor, but what qualifies as “reasonable” is left unclear. Depending on the nature of the business in question, there could be many factors that affect the level of compensation chosen for the business’s shareholders, including the following: When possible, companies tend to pay their officers wages that reduce taxes. For example, a C corporation might increase their shareholder’s compensation, and eliminate dividends, to avoid double taxation, while an S corporation might decrease their shareholder’s compensation in order to reduce payroll taxes. The shareholders may be receiving deferred compensation that was earned in previous years when the company […]


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