The Role of Tax Affecting in Pass-Through Business Valuations

ARTICLE | July 16, 2025

When it comes to valuing businesses organized as pass-through entities, one topic continues to spark debate among valuation experts and tax professionals: tax affecting. In short, this concept involves applying a hypothetical entity-level tax rate to the projected earnings of an S corporation, partnership, limited liability company, or sole proprietorship, despite the fact that these forms of business don’t actually pay taxes at the entity level. Instead, the owners of these entities typically pay taxes on their personal returns. Yet, in certain valuation contexts, professionals have long argued that considering a notional corporate tax rate can yield a more realistic appraisal of a pass-through’s true economic value.

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