Proposed IRS Regulation Could Hurt Family-Owned Business

Monday, August 22, 2016

Last week, the Treasury Department proposed regulations that could significantly change family businesses’ succession plans and make it harder for family owned businesses to transition to the next generation. These changes proposed to section 2704(b) of the Internal Revenue Code would remove legitimate valuation discounts for estate, gift, and generation skipping taxes which businesses have used for the past two decades in order to prevent the Internal Revenue Service (IRS) from overvaluing their businesses at death.

The IRS currently grants minority discounts as a way of recognizing that the “minority owner” of a family business (one who owns less than 50% of a business) cannot obtain the same price-per-share as the “majority owner” (one who owns more than 50% of a business). Minority discounts allow a minority owner to value shares lower when reporting to the IRS, and thereby reduce overall tax liability. Eliminating these reasonable discounts will force family business owners to report higher values to the IRS than they could expect to obtain from a buyer, and thereby pay higher taxes at death.

NLBMDA is a member of the Family Business Coalition, which has done a brief analysis of the proposal and its implications for family-owned businesses. FBC’s analysis of the proposal can be found here. NLBMDA is currently evaluating the proposal and may submit comments to IRS prior to the November 2 comment deadline.

NLBMDA 8/22/2016

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