Tax Reporting and Planning Services
Section 409A
Section 409A applies to deferred compensation plans. Compensation via stock options is defined as deferred compensation, with 409A plans being non-qualified. All non-qualified plans must comply with Section 409A rules or risk losing the tax-deferred status of the plan and subject participants to having all previous plan deferrals declared immediately taxable at a participant’s regular tax rate plus a 20% penalty tax. The recipients can defer the tax on their compensation if the fair market value of the underlying security is not higher than the exercise price of the option as of the grant date.
For a privately-held company, the 409A valuation is the most common approach to achieving Section 409A “safe harbor” status. Therefore, the valuation of the underlying security prior to the options granting is critical, and the analysis is often complex. YMS Value meets the IRS requirement for an appraiser performing a 409A valuation to have “significant knowledge, experience, education and training.”
Charitable Contributions
When itemizing deductions on a federal tax return, a charitable deduction for the donations can be claimed. According to the Internal Revenue Service (IRS), a taxpayer can deduct the fair market value of the donated item(s). Fair Market Value is defined by the IRS as: "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Fair market value is not to be determined by a forced sale price, nor to be determined by the sale price of the item in a market other than that in which such item is most commonly sold.
Estate and Gift Tax
Common purpose of valuing an interest in a closely held business is to determine gift and estate tax. Ownership interests in closely held entities must be valued when transferred as a gift or as part of an estate. Under this scenario, the recognized standard of value is “fair market value,” as defined above. In addition to other valuation standards, valuation reports must meet the valuation guidelines established under Revenue Ruling 59-60 for gift and estate tax purposes. Valuation discounts for lack of control and lack of marketability are often applied when valuing minority interests in closely held entities under the fair market value standard. These valuations, however, can be challenged by the IRS, and YMS Value can provide a detailed and supportable valuation report.
Discounts
Court cases reveal that the valuation of closely held entities involves judgment, and have long upheld a premise often reflected in expert opinions—that the value of closely held interests is usually less than the value of similar publicly traded interests. The factors underlying this premise include the inability to quickly convert the property to cash at minimal cost (“lack of marketability”) and the inability, if the interest held is a majority interest, to control managerial decisions and other aspects of the entity (“lack of control”). YMS relies on various benchmarks and analyses, both quantitative and qualitative, to support control and marketability discounts.
Conversions
Entities can make a decision to convert from a C corporation to an S corporation or from an S corporation to a C corporation whenever there are tax advantages associated with changing the election. However, the conversion presents a number of tax and valuation issues. To minimize your exposure, a thorough valuation of all tangible and intangible assets is critical before converting, and YMS Value can provide a detailed valuation analysis.