Because corporate and other business interests are family property a business valuation is usually required to determine the value of the business. Business valuators will review all of the financial statements of the business and they will also make what we call normalization adjustments.
The first type of adjustment is to increase the net income of the business where one or more non arm’s length family members are receiving either a salary or dividends which they have not earned or for which they are being overpaid.
The second type is to increase the net income of the business to include all of the discretionary and/or personal expenses which are paid for by the business. For example, if a business owner claims an automobile allowance for a vehicle which is expensive and which is not required to run the business a portion of that expense will be added back to the net income. Also if a person is deducting personal travel, entertainment or other expenses these will also be added on to the business income.
Deborah A. Todd