October 26, 2017
Any business owner developing a succession plan should rightfully assume that regular business valuations are a must. When envisioning the valuation process, you’re likely to focus on its end result: a reasonable, defensible value estimate of your business as of a certain date. But lurking beneath this number is a variety of often hard-to-see issues.
Estate tax liability
One sometimes blurry issue is the valuation implications of whether you intend to transfer the business to the next generation during your lifetime, at your death or upon your spouse’s death. If, for example, you decide to bequeath the company to your spouse, no estate tax will be due upon your death because of the marital deduction (as long as your spouse is a U.S. citizen). But estate tax may be due on your spouse’s death, depending on the business’s value and estate tax laws at the time.
Speaking of which, President Trump and congressional Republicans have called for an estate tax repeal under the “Unified Framework for Fixing Our Broken Tax Code” issued in late September. But there’s no guarantee such a provision will pass and, even if it does, the repeal might be only temporary.
So an owner may be tempted to minimize the company’s value to reduce the future estate tax liability on the spouse’s death. But be aware that businesses that appear to have been undervalued in an effort to minimize taxes will raise a red flag with the IRS.
Inactive heirs and retirement
Bear in mind, too, that your heirs may have different views of the business’s proper value. This is particularly true of “inactive heirs” — those who won’t inherit the business and whose share, therefore, may need to be “equalized” with other assets, such as insurance proceeds or real estate. Your appraiser will need to clearly understand the valuation’s purpose and your estate plan.
When (or if) you plan to retire is another major issue to be resolved. If you want your children to take over, but you need to free up cash for retirement, you may be able to sell shares to successors. Several methods (such as using trusts) can provide tax advantages as well as help the children fund a business purchase.
Obtaining a valuation in relation to your succession plan involves much more than establishing a sale price, transitioning ownership (or selling the company), and sauntering off to retirement. The details are many and potential conflicts abundant. Let us help you anticipate and manage these complexities to ensure a smooth succession.
It’s been said that timing is everything. With the reduction of individual income tax rates under the Tax Cuts and Jobs Act, now may be the right time to convert a traditional IRA to a Roth IRA.
The Section 179 deduction has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of depreciating them over time. For 2019, the maximum deduction is $1.02 million, subject to a phaseout rule if more than $2.55 million of eligible property is placed in service during the tax year. Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for assets such as machinery and equipment. Under the 100% bonus depreciation tax break, the entire cost of eligible assets placed in service in 2019 can be written off this year. Contact us to learn how your business can maximize the deductions.
Business owners have been engaging in bartering transactions for hundreds of years. But if your company trades goods or services today, be aware there are tax consequences.