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The New Tax law – Russ Glazer

The new tax law will have an impact on how privately held businesses are valued, under both the income approach and the market approach. Webinars and articles will be forthcoming in the business valuation literature proposing ways to alter our analytical tools and procedures. After the Gross v Commissioner Tax Court case of 1999, members of our profession rose to the challenge and developed numerous models addressing the tax affecting of pass-through entities; I expect a similar “call to action” this time around.

The new tax law has several components that will impact on the value of a privately held company. Among the more impactful provisions are those for bonus depreciation, limitations on interest deduction and, of course, the corporate income tax rate for C corporations. These changes have implications for both the Income Approach and the Market Approaches in business valuation.

One of the “cardinal rules” of business valuation is that, when projecting a company’s net cash flow in the terminal year, capital expenditures must be at least equal to depreciation expense, and frequently must be higher than depreciation expense. The terminal year is the year in which the company’s future cash flows have achieved a stable, long-term growth rate. The new tax law’s provisions regarding “bonus” depreciation may turn this assumption on its head.