For various reasons, S Corporations sometimes will pass through earnings to owners, rather than distributing the earnings as wages. Investors many times purchase a company based on some estimate of the expected normalized earnings of the business. One of the key normalization adjustments used to determine the fair market value (“FMV”) for an S corporation is an adjustment for reasonable compensation. When the fair market compensation rate is determined, earnings are affected by the salary adjustment, and a better reflection of the business’s earnings potential to a hypothetical investor can be developed.
Normalization adjustments, including compensation adjustments, should be considered in valuing closely held businesses of all entity structures, but especially for S Corporations.
Schneider Downs has significant experience in determining the FMV of entities. In addition, we have tools to assist in determining market compensation adjustments.
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