The Tax Cuts and Jobs Act Creates A Great Opportunity To Gift Your Business
President Donald Trump signed the Tax Cuts and Jobs Act of 2017 into law on Dec. 22, 2017, triggering discussions about the various income tax implications of the new law, but little is being said about how this legislation will impact succession planning for business owners.
Read Also: Considering Gifting Your Family Owned Business?
First and foremost, the law will double the exemption (expected to be $11.2 million per person and $22.4 million per married couple), effective for transfers made and decedents dying after 2017. However, similar to the changes to the gift and estate tax exemption made in 2001, this change is not permanent. What will ultimately happen is that this particular section of the bill will “sunset” at the end of 2025, meaning the exemption will go back to the 2017 level of $5 million, plus inflationary adjustments.
Opportunity Knocks
The new higher exemption level creates a particularly great opportunity for business owners who are considering transferring their business to the next generation.
However, since the new exemption will not be made permanent, business owners should consider large gifts of their business’s interest to “lock in” the benefit of the higher exemption before it is scheduled to sunset. For most business owners, this means there’s an opportunity to gift their entire business interest “tax free” before the law sunsets in 2025.
Like in the past, future administrations could reduce the exemption level prior to 2025. Therefore, if you believe your company will be more valuable in the future, business owners may want to gift now while the value of their business is lower. Regardless, planning is critical. A Business valuation expert can help you determine the best course of action for your particular situation.
Your Best Move
If I’m being honest, this appears to be the best tax-free opportunity I’ve seen in my three-decade career to pass a business on to the next generation. However, it’s important to note the significance of including a proper business valuation with your gift to ensure it meets the IRS’s standards. Moreover, your valuation should be performed by a credentialed valuator to help guarantee that your gift will not be challenged long into the future.
If the valuation attached to your gift meets the IRS standards, it can only be challenged by the IRS three years after it was originally filed. On the other hand, if the valuation fails to meet IRS standards or is prepared by someone who is not properly qualified, your gift can be challenged at any time in the future.
If you’re wondering about what your next move should be with regard to your own succession plan strategy, give me a call at 614.889.8725 or email Rea & Associates to learn more or to get in touch another member of our professional business valuations team.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)
Check out these articles for more information about succession planning:
Succession Planning Is Especially Important For Family Owned Businesses