Just last year, the U.S. Treasury Department and the IRS issued a proposal to place limitations on business assets transferred from one generation to another. The move threatened to substantially impact existing valuation and estate planning practices for owners of privately-held businesses that helped curb the tax impact of passing their companies on to the next generation. Fortunately, the controversial Section 2704 regs landed on a list issued by the Treasury Department. The list consisted of regulations that will undergo a review process – resulting in a modified and more streamlined version, or being withdrawn altogether.
The proposed guidance, considered by many to be one of the most sweeping changes to estate tax policies in the last 25 years, would be detrimental to countless enterprises and family-owned businesses. In its current form, the regulation seeks to hinder business owners from obtaining valuation discounts, which have become a significant component of most (if not all) estate planning practices among family-owned businesses.
In April, after fielding a “firestorm of criticism,” the Treasury Department issued its regulation review list in response to an executive order from President Donald Trump that took aim to reduce tax regulatory burdens on America’s businesses.
Typically, when valuing a closely-held business, minority discounts can be anywhere between 25-40 percent, which substantially reduces the value of the portion of the business that is subject to estate and gift taxes. This practice is used to pack more of the business’s assets into the $10.9 million lifetime exclusion from estate and gift taxes for married couples, resulting in significant tax savings.
According to Business Valuation Resources, a final report for recommendations on proposed reforms will be released by the Treasury Department and IRS on Sept. 18. The regulations under review (eight in total) could undergo modification or be fully repealed.
For the sake of the business owners we work with every day, we are hopeful that, come Sept.18, we can proceed with business as usual.
In the meantime, keep in mind that business owners who regularly set aside time for succession planning early on in their careers often find themselves in a better position when preparing to transition into the next phase – whatever that may be. Working with a trusted business advisor who can navigate you through the process is an essential component to an effective succession plan – and ultimately achieving your goals. Together, you can develop a plan that will help you secure your legacy while minimizing the tax liability associated with certain exit strategies.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)