Discussion:S Corporation Stock Compensation Valuation Method?
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Discussion Forum Index --> Tax Questions --> S Corporation Stock Compensation Valuation Method?
Barbeque17 (talk|edits) said: | 17 June 2008 |
| Hi All,
I have an S Corp client that is interested in issuing shares of its stock to a key employee as part of compensation. I understand that the stock will need to be valued prior to issuance and included in the W-2 wages of the employee subject to payroll tax withholding requirements. My question relates to the valuation. This is a small S Corp (2SH's and 3 Employees) that is very fee sensitive. Is there a quick and easy way to perform and adequate valuation of the business? Thanks. | |
RoyDaleOne (talk|edits) said: | 17 June 2008 |
| No. | |
Barbeque17 (talk|edits) said: | 17 June 2008 |
| What can be done in this situation? | |
| June 17, 2008 | |
| Well, I disagree with RoyDale here. You can get it reasonably close enough to make everyone happy without spending $2-5k like some of these charlatans out there charge. It's expected that you have some experience in the small biz world, and perhaps have a valuation report or two at your fingertips to work from. But IRS and the stock market both expect that you're basing value on price/earnings ratio, or net asset value. In some industries, you can be lucky and find a formula that's commonly used. I search for those, work up a weighted cash flow for the past 3-5 years (IBITDA), and assess the net asset value if it matters. You can do all that in a few hours. Is it going to hold up in court? Probably not. So you must kill the litigants if it comes to that. | |
| June 17, 2008 | |
| I'm working with a client right now doing the same thing.
His "consultants" are starting with book value, from an accrual based balance sheet. Plus/minus the book value of the fixed assets (computed with straight line depreciation) to fair market value and add goodwill. The goodwill is the biggest variable; that's where the P/E ratio helps if you are dealing with an industry/business that you can find a 'normal' ratio to use. I've done similar valuations for divorce situations. Then the other side goes and gets one of those $2-5k charlatans JR1 mentioned. There's usually very little difference! | |
RoyDaleOne (talk|edits) said: | 17 June 2008 |
| JR1 good, I am glad someone disagrees with me. | |
| 18 June 2008 | |
| Plus, remember for income tax purposes, the deduction on the Corp return will be equal to the W-2 income to the new shareholder, so I don't think the IRS would be inclined to get very interested in disputing the estimate of the value. | |
