Monthly Archives: March 2015

Discount For Lack of Marketability (DLOM)

The valuation of a privately held, nonpublic business at fair market value requires a consideration of the issues of liquidity and marketability. For purposes of this discussion, these terms are synonymous. Since the owner of the business is unable to convert the value to an immediate sale and realization of cash, the risks associated with this time period enhances the likelihood of not realizing the value appraised the longer the time period between valuation date and actual sale. This creates a need for a discount for lack of marketability from the appraised valuation.

There are no set of defined risk levels which will produce a stated discount and various risks may overlap. Thus the expert business appraiser must determine the appropriate level of the illiquidity discount considering these factors. The typical application of applying a marketability discount to a business value can result in an indicated valuation which reflects anywhere from 10%-to 40% of the value computed without such consideration. Thus the discount can play a very significant role in the valuation of privately held businesses for the purposes of gifts, succession planning, divorces, shareholder disputes, and damages litigation.

–Dennis B.Kremer, CPA/ABV/CFF/CPCGMA, CVA, Partner

Donate Your Car Today …

We’ve all heard the commercial “Donate your car today …” If your motivation is to clear out a parking spot in the driveway, then that’s a very fast way to do it. If you are trying to claim a tax deduction instead of the hassle of selling the car, then continue reading.

Most people will receive very little, if any, tax benefit by donating their car to a charity with the catchy jingle. To claim the charitable contribution, you must itemize your deductions. When you file your tax return, you need to choose between a standard deduction, which ranges from $6,300 for an individual to $12,600 for a married couple filing a joint return, or itemized deductions. If you own a home and pay mortgage and real-estate tax, then most likely you will itemize your deductions, and receive some tax benefit for your charitable donations. In the past, most people who donated a car claimed blue book value of the car as the charitable donation. Using this option, when you gave a clunker that did not run, you could still claim that the car was in pristine condition. The Internal Revenue Service (IRS) wised up to the fact that people were claiming inflated charitable contributions, and charities did not receive a corresponding benefit.

The American Jobs Creation Act of 2004 put significant limits on the charitable deduction for donating a motor vehicle, boat or a plane. If the charity sells the donated vehicle, then the charitable contribution is limited to the actual sales price of the vehicle when sold by the charity. The deduction is further reduced by any incentive received from the charity. The charity is required to issue form 1098-C to the donor showing the sale price. Most cars donated to the charity with the catchy jingle, are sold at auction. The charity then uses the proceeds of the sale to further its goals. So if you donate a car with a blue book value of $5,000 and fair market value of $3,000 and the charity sells the car for $1,000, your charitable contribution is limited to $1,000. If you are in the 25% tax bracket, your tax savings from donating the car will be $250.

You can claim the fair market value of the vehicle in the following circumstances.
• The charity will make significant use of the vehicle. (My favorite charity that will make full use of the vehicle is the local fire department. Maybe, they will let you observe how they “use” it.)
• The charity will make significant improvements or major repairs to the vehicle.
• The charity gives or sells the vehicle to a needy individual significantly below market price.

So if one of the above situations applies, your charitable contribution in the example above will be $3,000 giving you tax savings of $750.
A better approach might be to trade in the old car when buying a new car. Many dealers will give you the fair market value of the car at trade in. So in the example above you will receive $3,000 towards the purchase of the new car. Further when you trade in a vehicle, you only pay sales tax on the difference between the final price of the new car and the trade in value of the old car. Assuming an 8% sales tax rate, that will save you an additional $240. This will give you an immediate benefit of $3,240 even if you do not itemize your tax deductions.

So next time, talk to your tax advisor, before taking tax advice from a catchy radio jingle.

–Leon Granovsky, CPA, Senior Tax Accountant

Is Your Spouse Hiding Assets from You?

For the time being, let’s assume the answer is ‘yes’. Among other things, it may mean that your spouse has already undertaken a deliberate and secretive plan to erase any trail of certain marital assets that would otherwise need to be split with you upon divorce or might factor into alimony and child support. Such actions are at best unethical and at worst illegal. Unfortunately, such consideration of hidden assets should be done in every divorce action, whether or not a husband/wife believes that his/her spouse is “capable” of such wrongdoing. So if you are unsure what the answer is, you should consider taking a proactive approach to getting a more definitive answer.

What are some simple signs to look out for? Look around you with a pencil and paper in hand. If the lifestyle your family leads over a period of time doesn’t correlate with what you see as inflows and outflows from bank and investment accounts or from cash on hand during that same period, that may mean that assets may exist elsewhere that you’re not considering or, worse yet, that you’re not aware of! Typical of many couples is that one spouse manages the family finances while the other consciously chooses not to be involved at all or to the extent of the other. Attorneys would call this ‘opportunity’. With a future divorce in mind as motive, this opportunity could change the persona of your spouse to someone who is “capable”.

If you’re not comfortable performing such a lifestyle analysis or it’s too complex due to numerous transactions or accounts, certified forensic accountants are well-versed at performing these functions. Even if you’re not ready psychologically to take these steps, at a minimum protecting financial records is a must. If you’re already aware that divorce is on the horizon, you need to switch into protection mode by consulting with an attorney who will advise you what should be done.

–Steven Fultonberg, CPA, CVA, Partner