Tax Affecting
Examples argue there is a mismatch between pre-tax cashflows and the after-tax discount rates that must be corrected .
They argue that relying on the public market data that is principally derived from publicly traded C corporations requires an appraiser to adjust the earnings stream to put a pass-through entity on equal footing with a C corporation .
1 .
Federal taxable income is net of the state tax . $ 1 million less state corporate tax of $ 88,400 equals federal taxable income of $ 911,600 . Federal taxable income is multiplied by 21 % ( 911,600 * 21 %=$ 191,436 ).
2 .
Includes a 20 % reduction in federal taxable income for the Qualified Business Income Tax Deduction . $ 985,000x20 %=$ 197,000 Qualified Business Income Tax Deduction . $ 985,000- $ 197,000 =$ 788,000 in federal taxable income . $ 788,000x37 %=$ 291,560 .
3 .
California does not allow for a deduction of state income tax paid at the entity level . Therefore , tax is calculated using net income before tax , rather than net income before individual tax .
Close Look at the Arguments The argument appears logical at first . However , it fails to acknowledge publicly traded pass-through entities that pay the same taxes as privately held passthrough entities .
And if we look at the publicly traded markets , there is a significant amount of institutional investors with no immediate tax consequences including trusts , retirement plans and not for profit entities .
Many of these will pay no individual income tax or it will be delayed years into the future .
Proponents of tax affecting will also argue that failing to tax impact the earnings of the business ignores that entity level taxes are paid by the business owners since the tax is simply passed through to its owners and not paid by the business entity .
Once again , the argument appears logical at first , but when you analyze the actual taxes paid by business owners , it requires a business appraiser to speculate as to what individual tax rate to use and any tax benefits received by the owner .
18 CALIFORNIA CPA MARCH / APRIL 2024 www . calcpa . org