Most appraisers I know believe that “S” corporation earnings should be tax-effected. I do, too.
Having said that, however, I have run into an exception: “S” corporations owned all or in part by ESOPs. ESOPs are income tax-exempt. A client owns 60% of an “S” corporation,and the ESOP owns the rest. The Company makes distributions to cover the client’s personal tax liability. It must also make a proportional distribution to the ESOP. The ESOP’s distributions are not taxed, so the distributions inure to the vested participants (or, if there are unallocated ESOP shares, to their unallocated value).
The bottom line: do not tax-effect when valuing ESOP shares owned by “S” corporations.