Estate Planning

IRS Valuation Guidance

The IRS requires that estates accurately value all assets, including businesses, for estate tax purposes. Failing to do so can lead to either underpayment or overpayment of estate taxes, which can result in investigations, audits, penalties, incorrect taxation and legal issues.

One of the key sources of guidance for business valuation is Revenue Ruling 59-60, which sets forth the factors that should be considered when determining the value of a business for tax purposes. These factors include the nature of the business, its history and financial condition, the economic outlook for the industry, and the market for the company’s stock or assets.

In addition, the fair market value standard is the ‘standard of value’ used by the IRS to determine the value of property, including businesses, for tax purposes. Fair market value is defined as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.

Our deep knowledge of the tax landscape specific to business valuations, with tried and proven valuation processes against federal tax authorities allows us to deliver highly defensible conclusions of value.

See a recent case study that identifies this importance and significant value added through our two face valuation approach.

Estate Tax Threshold – Avoiding Improper Taxation

Proper business valuation can help you avoid improper taxation. The federal estate tax exemption is currently set at $12.92 million for 2023, ($25.85 million for married couples) and if your estate is valued above this threshold, you may be subject to estate tax, up to 40%. However, by accurately valuing your business, you may be able to avoid improper taxation.

A common way to minimize tax upon death is to gift a portion of it prior to death to your beneficiaries. There are specific limits and amounts for gifting conscious of the federal exemption and any appliable state estate tax thresholds, whilst the value of the gifted portions of the business should be determined by a business valuation, which is why it’s crucial to ensure that the valuation is accurate and in compliance with IRS regulations.

Discounts – Minority, Marketability, and Key Man

Discounts are often applied to the value of a business or the specific parcel of interests (shares) for estate planning purposes, lowering the value and hence taxable amount. These discounts can include minority discounts, which are typically applied when an individual does not have control of the business (a minority stake), marketability discounts, which are applied to a minority interest in a privately held business that lacks the marketability of shares that trade on a public stock exchange, and key man discounts, which are applied when the business depends heavily on a single individual.

Discounts are often very material to the valuation, and hence are highly scrutinized by the IRS. The best defense is to have applied the correct discounts, customized based on the case facts that are substantiated, supported and cited by well-established research literature within the valuation report.

InteleK’s accredited appraisers are well versed in the estate planning landscape, working with your advisors to deliver highly defensible conclusions of value that minimize the risks of audits, penalties, improper taxation and potential litigation.