News & Events

Big Changes for Gift Valuation

What will my business be worth under the IRS’ proposed regulations?

– by Catherine Parente, CPA/ABV/CFF, CVA, CFE, MAFF, Partner

Gift Valuation

The IRS has a number of rules defining how you value your business interests. It is important to know these rules if you are planning on gifting interests in your business to the next generation or in the event that a business owner dies and their estate needs to report the value of their business interests to the IRS.

The IRS defines fair market value as “the price at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”

The IRS has historically allowed discounts for the lack of marketability and discounts for lack of control in valuing interests in privately held business interests. In many cases, these discounts have been significant. The IRS is now attempting to eliminate these discounts for the vast majority of family-controlled entities for estate, gift, and generation-skipping transfer (GST) tax purposes. The IRS has proposed regulations (IRC Section 2704 regs) that would treat the lapse of voting or liquidation rights as an additional transfer and disregard certain restrictions on liquidation in determining the fair market value of a transferred interest. Thus, the result could be that discounts for lack of marketability and discounts for lack of control could be eliminated in the future thereby making the value of your business interests higher.

Many business valuation experts believe that this is a legislative attempt to redefine the fundamental premise of and change the definition of fair market value. The IRS’s goal is to prevent taxpayers from “undervaluing” transferred interests among family members. Some of these concepts run in contrast to the marketplace which differentiates values of minority interests as compared to the value of entire enterprises.

Formal comments on these proposed regulations are due to the IRS by November 1, 2016. There will be a public hearing December 1 at the IRS. There is no effective date yet for these new regulations. Stay tuned for updates on this very important topic.