Tax affecting the earnings of pass-through entities remains one of the thorniest valuation issues: There’s no clear guidance on which method to use and significant divergence of opinion between valuation practitioners and the government. Worse, the consequences of being on the wrong side of the issue can be damaging to a taxpayer. 

The general issue remains that pass-through entities, for example, S corporations (S corps), pay no taxes. The government’s position is usually that such companies should be valued based on their pre-tax earnings. However, a business owner (aided by a relatively unanimous appraisal community) would tend to feel differently: The business owner pays taxes on their S corp earnings every year, so valuing the busine…