April 30, 2020
Tax Planning During Declines in Business Value
Business values may be on the decline, but have you considered tax planning during this health crisis?
It has been seven weeks since the WHO officially recognized COVID-19 as a pandemic. During this time, many of us have seen the devastating impact the pandemic has had on individuals and businesses across the country.
To shed some optimism during this plight, we do get to enjoy the extra family time afforded by hunkering down at home. Likewise, some businesses have learned to adapt to the new economic environment by changing the way they offer their goods and services.
That said, most businesses have seen their cash flows suffer as a result of office and facility closures, limited contact with customers, an increase in customer attrition and disruptions to their supply chain network, amongst other things.
A Coronavirus Silver Lining
Invariably, a drop in cash flows leads to a decline in business value. Tax planning during the coronavirus pandemic can be a silver lining for business owners, providing opportunities in estate and succession planning.
For example:
Business owners could perform an estate freeze, with the assistance of their tax and legal professionals. This would efficiently manage their overall tax liability while shifting the future growth of the business to the next generation. Business owners prefer a lower business value to minimize estate taxes arising from this freeze.
According to Mergermarket, the value of global mergers and acquisitions deals in the first quarter of 2020 was down 39.1% compared to the same period in 2019. Valuators estimate, on average, values of privately-held businesses have fallen anywhere between 15% and 40% during the span of this outbreak. We do stress, however, that every business is unique and there are businesses that have thrived during this pandemic; notably, cloud-based companies where its main service offerings are delivered online.
While there are some short-term pains in the business as it adapts to the pandemic, having an effective tax plan in place and taking advantage of the unique opportunity of lower business values will benefit business owners in the long run as business owners are able to transfer a greater portion of their business to the next generation while at the same time, reduce their estate tax liability on their corporate assets.
Summary
While COVID-19 has brought an unforeseen level of changes and uncertainty to our economy and business environment, we have seen many positive outcomes as well. From neighbours helping each other through these tough times to landlords foregoing or deferring rent payments from tenants, there are silver linings even during the worst of times.
While it is not reassuring for business owners to see their businesses go down in value, those who have reached the stage in which they are planning for the next generation may benefit by having some tax planning done now. Despite recent declines in business value, tax planning during the coronavirus pandemic will help ensure the future growth in the business flows to the next generation and a lower tax bill arises from this transition.
We Are Here to Help
Manning Elliott is here to help. To assist business owners in navigating through these trying times, visit our blog to stay up to date on the most recent activity related to COVID-19.
Stay tuned for information on an upcoming webcast on tax planning and valuations. To be notified of this webcast, please subscribe to our mailing list here.
If you have any questions on how to value your business at this time, please contact William Tam, CPA, CA, CBV directly.
This content is believed to be accurate as of the date of posting. Canadian Tax laws are complex and are subject to frequent change. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.