Proposed IRS Regulations Impact Family-owned Businesses

Recently, the Internal Revenue Service proposed new estate tax regulations that would make transferring interests in family-owned businesses more difficult and costly than under current guidelines.

Under current law: Because of the estate and gift tax, many family-owned, closely held business owners are challenged in how they can pass on their business interests to their heirs. If a business owner waits to transfer his/her business at death, the business interest is subject to the estate tax at full fair-market value, less the exemption amount. 

A popular technique is to gift small ownership pieces over time, such as 10 percent of a business in one year. That interest is a “minority interest.” The value for tax purposes is also discounted relative to fair-market value because control remains with the older generation.

With multiple transfers over time, the entire business can be “gifted” at a minority interest discount, and the total amount subject to tax is substantially less than if the entire interest were taxed at death at fair-market value.

IRS proposal: The Section 2704 regulations would eliminate the discount applied to these “minority” gift transfers for closely held, family-owned businesses. This is causing a significant amount of concern for family-owned businesses throughout the country, and many are trying to plan around this consequence before the regulations become final. 

If this proposed change concerns you as part of a family-owned business, there is an opportunity to have your voice heard. The National Association of Manufacturers (NAM) is working with the Family Business Estate Tax Coalition (FBETC) to deliver a joint sign-on letter to Department of Treasury Secretary Jack Lew urging the withdrawal of new estate tax regulations recently released by Treasury. It is open to all family-owned businesses/corporations, business associations and chambers of commerce. To sign on, follow this link. The deadline to sign is Monday, Sept. 26, by 4 p.m. CDT.

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