If you are the owner of a closely-held business and desire to gift a portion or all of your business, or if your business will be valued in an estate in the future, you may be affected by recently issued proposed rules from the US Treasury and Internal Revenue Service. The proposed rules relate to the use of valuation discounts, such as lack of marketability discounts or minority share discounts, which have been commonly recognized in the past. For gifting purposes, there is currently a window of opportunity if you desire to utilize these discounts before the proposed regulations become final.


Business appraisers have long understood that the value of a closely-held or family-owned business may be significantly lower than a comparable widely-owned or publicly-traded concern for which a large market exists. This is especially true for minority shareholders, who have little or no say in how the company is operated or managed. These limitations are commonly expressed as marketability or minority interest discounts when valuing business interests.


The new regulations proposed in early August would limit or prohibit appraisers from considering the effect of marketability or minority interest discounts when valuing certain businesses for gift or estate tax purposes. The effect of these restrictions would be to create a minimum valuation "floor" that in many cases would cause an asset to be taxed for gift or estate tax purposes at a value significantly in excess of its actual fair market value.


What Does This Mean For You?


These new rules will not become effective until the proposed regulations are finalized. This will not occur until sometime after December 1, 2016, at the earliest, when a public hearing is scheduled to be held on the proposed changes.


Public comments on the proposed regulations must be submitted to the IRS by November 2, 2016. You may visit www.regulations.gov or call us at the number below if you are interested in learning more about submitting a comment.


In the meantime, we would welcome a discussion with you on how these rules may affect you or your business and discuss possible strategies for dealing with them. You may consider making gifts before the end of the year to take advantage of marketability or minority interest discounts while they are still available.


If you would like to speak to us further about the impact of these changes, please call us at (952) 893-9320 and ask to speak to your regular Boulay advisor, or email Kim Wittmers at kwittmers@boulaygroup.com.


File Download: IRS Proposed Regulations Would Increase Gift and Estate Tax Value of Closely-Held Businesses