As the summer nears its conclusion, those individuals that previously applied for an extension to file their 2019 individual income tax returns are becoming increasingly aware of the impending October 15th deadline. Couples that divorced after the Tax Cuts and Jobs Act (TCJA) of 2017 are already cognizant of the changes affecting alimony. Before the TCJA, alimony received was taxable to the recipient, and deducted, dollar for dollar, by the payer in the determination of their adjusted gross income. Thus, deductibility of alimony historically provided specific incentives in negotiating a divorce settlement. For couples divorcing after the TCJA, the payment and receipt of alimony is neither deductible nor taxable. In many instances, this change has created a significant tax burden for those paying alimony. While this change has been effective now for several years, our firm still get requests from attorneys to quantify the lost tax benefit resulting from the change in the tax law. Today, we revisit how this change affects those paying alimony. Let us take for example a taxpayer (filing single and utilizing the standard deduction) who earns a salary of $75,000 per year and pays annual alimony of $21,000. As the following table illustrates, the taxpayer’s income tax liability will increase by $6,700 or 71.3% resulting from of the tax law change. OLD LAW NEW LAW Wages $ 75,000 $ 75,000 Alimony 21,000 0 Adjusted Gross Income 54,000 75,000 Standard Deduction Filing Single Taxable Income $ 41,800 $ 62,800 Federal Taxes 5,100 9,700 NY State […]
Category: Divorce & Matrimony
We have distilled decades of experience at the intersection of law, business and finance into a suite of articles to help our clients make sense of business valuation, forensic accounting, and litigation support. Please visit our site regularly for our latest content.
Do You Remember When Alimony Was Deductible?
Posted in Divorce & Matrimony, on Sep 2020, By: Mark S. GottliebShare
Classifying Shareholder “Loans” In Business Valuation
Posted in Business Valuation, on Jan 2020, By: Mark S. GottliebShare
Are loans due to or due from shareholders a bona fide debt obligation, a form of equity capital, or a hybrid of the two? This distinction is relevant when valuing a business – particularly in a shareholder dispute or in a divorce case. I customarily devote a good portion of class time discussing this issue in my class at Fordham Law School. This distinction may cause a material difference in the ultimate valuation of a closely-held business or even the income attributed to its owner. Often, experts turn to the Internal Revenue Service for objective guidance on this issue. What Would The IRS Say? Owners occasionally borrow funds from their businesses, say, to pay a child’s college costs or provide a down payment on a vacation home. These loans to shareholders appear on a company’s balance sheet as a receivable. For loans of more than $10,000, the IRS requires taxpayers to treat the transaction as a bona fide debt. Then the company must charge the shareholder an “adequate” rate of interest. Each month the IRS publishes its applicable federal rates (AFRs), which vary depending on the term of the loan. If the company doesn’t charge interest or follow a complicated set of below-market interest rules to impute interest on the loan, the IRS may claim the shareholder received a taxable dividend or compensation payment rather than a loan. The company may deduct the latter, but it will also be subject to payroll taxes. However, both dividends and additional compensation […]
The Income Approach Simplified. DCF v. Capitalization of Earnings Methods
Posted in Business Valuation, on Feb 2019, By: Mark S. GottliebShare
Recently, while testifying to the fair market value of a closely-held business, the attorney began off-scrip and asked, “Mr. Gottlieb, what is valuation?” He didn’t ask me to explain the genesis of the fair market value standard or the premise of value used in my report. He completely ignored the first set of questions we carefully planned. My initial response was, “excuse me”. He repeated the question, “What is valuation?” Not to lose the attention of the Judge, I responded with confidence, “Valuation is the prophecy of the future”. With that, the usual and customary questions defining the general valuation theory and how one selects the most appropriate method for each instance quickly ensued. We were back on track, following the script that has been written many times before. So, now that we are clear what valuation is, the next question – How is the future determined? – needs to be addressed. The income approach is often used to determine the initial indication of value. Simply stated, the income or cash flow of the business that is expected to continue in perpetuity is utilized. In this week’s blog, we are providing our readers with a cram course comparing and contrasting the differences between the Discounted Cash Flow and Capitalization of Earnings Methods. The Discounted Cash Flow Method. The International Glossary of Business Valuation Terms defines discounted cash flow as “a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount […]
It seems like a lifetime ago that I sat down at my desk with a pile of folders ready to attack “tax season”. Perhaps it was. It’s been almost 30 years since I moved to be “exclusive” with business valuation, forensic accounting and litigation support. Although I am no longer routinely prepare income tax returns, I still keep up with the tax code – for no other reason than to be fluent when asked to lecture at various legal conferences or provide expert testimony. So, in the season of giving, I thought I would provide some thoughts regarding a few selected tax issues you should consider before the end of the year. Year-end tax strategies for accrual-basis businesses The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2018 tax bills. The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2019. Doing so will enable you to deduct those expenses on your 2018 federal tax return. Common examples of such expenses include commissions, salaries and wages; payroll taxes; advertising; and interest. Also look into expenses such as utilities, insurance and property taxes. You can also accelerate deductions into 2018 without paying for the expenses in 2018 by charging them on a credit card. (This works for cash-basis taxpayers, too.) In addition, review all prepaid expense accounts […]
Should You Consider Hiring A Joint Business Valuation Expert?
Posted in Business Valuation, on Apr 2018, By: Mark S. GottliebShare
The hiring of a joint business valuation expert can often be useful. This strategy assumes that the parties will openly share information and act in good faith. But it may not be realistic in all situations, including contentious divorces and shareholder disputes. Sharing fees and information When using a joint valuation expert, the parties will only be satisfied by the outcome if there’s a mutual perception of fairness. Perceived fairness is enhanced when: • Both parties have a say in the interviewing and selection of the credentialed expert, • The expert and both parties have full access to relevant information, such as tax returns, financial statements, responses to questionnaires and notes from site visits, • The expert’s communications between the parties are shared, and • Both parties contribute to the expert’s costs. The expert should explain upfront that the valuation will be performed in an objective, unbiased manner. If either party suspects that a joint valuation expert is biased, dissatisfaction may ensue, possibly leading to appeals and additional fees. Potential upsides When the conditions are right, using a joint expert can benefit both sides. The benefits extend beyond just saving money and streamlining the valuation process. A joint expert also helps minimize disruptions to business operations from site visits, information requests and management interviews. Additionally, parties that share a valuation expert prove that they can trust each other, improving the chances of effectively working together in the future. For example, buyers and sellers who share an expert to conduct […]
What Attorneys Need To Know About Financial Statement Adjustments In Business Valuation
Posted in Business Valuation, on Mar 2018, By: Mark S. GottliebShare
Information presented on a company’s financial statements may not always be meaningful from a valuation perspective – even if it follows U.S. Generally Accepted Accounting Principles (GAAP). Whether financial information is obtained from business income tax returns or audited financial records, valuation experts often make adjustments to get a clearer picture of a company’s financial position, market risk and ability to generate cash flow in the future. In some instances these adjustments may be due to some nefarious actions of the business owner. In other instances they may just be due to elections in accounting methodology or procedures.uing a business interest. Although these adjustments vary from case to case, many of them fall into one or more of the following types when valuing a business interest. Nonstandard accounting practices, Extraordinary or nonrecurring items, Hidden assets or liabilities, and/or Discretionary spending. The following is a condensed review of these common adjustments. 1. Nonstandard accounting practices A valuation expert may estimate value by using pricing multiples derived from comparable private and public transactions (under the market approach) and discount rates derived from returns on public company stocks (under the income approach). Thus, if the subject company deviates from how other companies in its industry typically report transactions, the valuator may need to make adjustments. Certain financial reporting practices may require adjustment, if the subject company’s methods differ from industry norms. Examples include differences in inventory, depreciation or revenue recognition methods. For example, if a company uses the last-in, first-out method (LIFO) […]
Three Critical Issues To Consider Before Valuing A Professional Practice
Posted in Business Valuation, on Mar 2018, By: Mark S. GottliebShare
You have just picked up a new case. Your client is a partner in a small or medium sized professional practice. Maybe it’s a medical practice, an accounting office or even a law firm. You were hired to serve as counsel in a shareholder dispute or even a divorce? It really doesn’t matter. What does matter is that your clients’ equity interest needs to be valued. After a long afternoon with your client you realize there are a number of issues that may derail a quick resolution to this dispute. Even now, you may have more questions than answers. Setting aside those concerns specific to your clients’ practice and profession – there are a few issues you need to consider. What is the appropriate standard of value to be used? What is the appropriate date of the valuation? and How is goodwill to be determine? (if at all) These issues are important to establish your client’s equity interest value, as well as other issues that may be germane. For instance in a matrimonial setting spousal and child support needs to be determined. In a shareholder/partner dispute income distributions and loans may need to be analyzed. The following provides a short discussion of same. 1. Standard of value The use of an incorrect standard (of value) can render a valuation report and the related testimony inadmissible. Fair market value and fair value are among the most common standards, but some jurisdictions now call for “intrinsic value.” Fair market value as defined […]
Owners’ Compensation – What’s Reasonable And Why?
Posted in Business Valuation, on Feb 2018, By: Mark S. GottliebShare
Many of you may know that I am an Adjunct Professor at Fordham Law School. This past weeks lecture included a discussion of normalization adjustments to be considered when utilizing the income approach in a business valuation. As I was presenting my talking points I remembered a lecturer I gave for the Internal Revenue Service many years ago. During that lecture on tax issues concerning closely-held businesses, I proudly stated that I could show business owners how to avoid (not evade) corporate income taxes by modifying shareholder-employee compensation before year-end. As you can imagine, my remarks were not warmly greeted by the IRS representatives in the audience. The IRS and closely-held business owners often disagree about the reasonableness of shareholder-employee compensation. This disagreement is found in both income tax and business valuation instances. For income tax purposes, business owners usually prefer to classify payments as tax-deductible wages because it lowers its federal taxable income and corporate taxes. But, if the IRS believes that an owner’s compensation is excessive, it may claim that payments are disguised dividends, which aren’t tax deductible. The determination and application of reasonable shareholder-employee compensation is also often a contested issue in business valuation. When shareholder-employee’s compensation is overstated, the available cash flow is often lower and the indicated value (under the income approach) is less. For this and other reasons, the determination of officer compensation is often a contested adjustment. Whether this conflict is between the taxing authority or an opposing valuation expert, the case law […]
Three Valuation Issues For Divorcing Business Owners & Their Spouses
Posted in Business Valuation, on Jan 2018, By: Mark S. GottliebShare
Splitting up a marital estate can be a long and complicated process, particularly if one of the assets includes a privately owned business. Fortunately, a valuation analyst can assist attorneys and their clients address these issues – even at the early stages of the matrimonial action. These preliminary issues often include, but may not be limited to: How much is the business actually worth? Do you need to be concerned about the issue of “double dipping” when considering the valuation of a business and the money spouses support obligations? Is the spouse that owns and operates the business deceptive when it comes to reporting his/her income? In this blog post we quickly discuss these three issues. For those of us that travel down this road often – you know that the totality of the financial concerns in a matrimonial matter can be significant. How much is the business actually worth? There are three methods used to value a business: the asset, market and income approaches. All of these techniques start with the analysis of the company’s financial statements. But discovery shouldn’t stop there, especially for spouses who aren’t involved in day-to-day business operations. Valuation experts should be given equal access to financial records and opportunities to tour the company’s facilities and interview management. Inadequate discovery can cause an expert to miss critical information and possibly lead to an inaccurate conclusion of value. If the business interest was owned prior the marriage, it might be appropriate to include only the […]
When the CEO of Continental Resources, Harold Hamm, divorced from his wife, Forbes published an article about the possible tax consequences. The settlement ordered Hamm to pay his former wife $995.5 million. Forbes asked the obvious question: with this kind of hefty transaction, the tax man must surely get his share, right? Not quite. According to law, transfers of property between spouses during a divorce are virtually tax free. Good news for the Hamms. However, there are often unseen tax burdens later on. Code § 1041 of the U.S. Internal Revenue Code lays out the rules for the taxation of marital property when it is transferred between spouses. Within the code, the “General Rule” states: “No gain or loss shall be recognized on a transfer of property” between spouses or former spouses. One can assume that during a matrimonial case, there are no worries over taxes involved in transferring property. In many cases, this is true. But there are some important things to consider before dividing marital assets. Below is an outline of some of the major issues that may cause tax consequences. For a more in-depth discussion of these issues, please follow the link at the bottom of this post to read our whitepaper. Carryover Basis Carryover basis is a method used to determine the tax basis of an asset when it has been transferred from one individual to another. In a divorce, the spouse that receives an asset also takes the carryover basis of the asset. Because the […]