Use the Advantage of the IRS to Gift the Family Business

By Heather Deskins, CPA/ABV/CFF, CFE, CVA

This article was published prior to the release of the Tax Cuts and Jobs Act of 2017

During 2017, the IRS annual gift exemption is $14,000. This means any one person can give another person up to $14,000 without paying gift taxes of 40%. There is no limit to how many people you can give a gift to. Depending on how many family members and friends you have, you can gift a small fortune away. Any gifts over $14,000 must be reported on a gift tax return (Form 709); however, the gift may be applied to the lifetime exclusion from Federal estate taxes up to $5.49 million; whereas taxes would not be owed. A married couple can give up to $28,000 to any one person and have a lifetime limit of $10.98 million. To most of us, this may seem like a large fortune.

For those clients that have a multi-generational closely-held business, slowly passing on the family business to the next generation, in value increments of $14,000 or less, to meet the annual gift exemption, may be a good strategy to gift a business, tax-free, while still maintaining majority control. And when the majority owner decides to retire; gifting, selling, or a combination thereof, applying the value of the remaining ownership interest against the lifetime exclusion, may be a good estate planning strategy.

Gifting an ownership interest of more than $14,000 in value, requires a business valuation be included with Form 709. The business valuation is used to determine the fair market value of the gift. Fair market value is defined as “The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” IRS Regulation §20.2031-1.

If making gifts in consecutive years, business owner’s may also benefit from the use of only one business valuation if the gifts were taking place on December 31st and then one day later on January 1st of the next year.

The general rule in gifting property, is that the tax basis in the property also transfers from the donor to the gift recipient. This means that the tax on any gain is essentially deferred until the property is sold.

If you have clients that are taking advantage of the gift exclusion and have a need for business valuation services, please contact P.D. Eye Forensics, LLC at 614.722.7914.

Heather Deskins, CPA/ABV/CFF, CFE, CVA

Heather Deskins,

Managing Member
P.D. Eye Forensics, LLC