August 6th, 2014 When is a Business Valuation Necessary? Did you know the concept of valuing closely held businesses was first introduced in the 1920s? The Eighteenth Amendment, which instituted Prohibition, forced businesses involved in the alcoholic beverage industry to close. This made it necessary to value their businesses in order to determine the extent of their losses. Since the 1920s, closely held businesses have been valued for a variety of reasons including: Mergers and acquisitions Gift taxes Estate planning and taxation Sales and divestitures Buy/sell agreements Fairness opinions Shareholder transactions Capital infusions Employee Stock Ownership Plans (ESOPs) Employee benefit plans Expert testimony/litigation support Solvency opinions Insolvency opinions Collateral valuations Purchase price allocations GAAP valuations under ACS 350 Charitable contributions Determination of net operating loss in bankruptcy Determination of liquidation value in bankruptcy S Corporation Elections – calculation of built-in gain per asset Banks – loan applications Eminent domain proceedings Marital dissolution During the next two decades, the baby boomer generation will reach retirement age. This demographic represents the 55-to-64 year age group which is expected to increase from 29 million in 2004 to 40 million in 2014. These retiring individuals represent the wealthiest generation in history and often hold interests in closely held businesses. Interests in closely held businesses present unique challenges during succession/estate planning. Succession planning entails transferring their businesses in the following ways: Gift the business to their heirs Sell the business to their heirs Sell the business to third parties Establish a charitable trust Establish an ESOP Issue options to key employees Regardless of the alternative selected, a valuation is usually necessary. Generally, individuals holding interests in closely held businesses want to keep these assets in their families, from which future generations will benefit. The IRS has enacted limits on tax-free gifts during life or at death which must be considered during succession/estate planning involving interests in closely held businesses. There are two types of exclusion limits that apply to federal gift taxes: the lifetime gift tax exclusion and the annual gift tax exclusion. The lifetime gift tax exclusion is the total amount that can be gifted by an individual free from federal gift taxes over his or her entire lifetime and at death. This lifetime gift tax exclusion was increased to $5,340,000 on January 1, 2014. The annual gift tax exclusion is the annual amount that can be gifted by an individual free of federal gift taxes without dipping into the lifetime gift tax exclusion. This annual gift tax exclusion was increased to $14,000 on January 1, 2014. Gifting individuals who exceed these limits could owe federal taxes up to 40%. For more information, please contact David Whitney CPA/ABV, CVA at 401-752-0545 or Catherine Parente CPA/ABV/CFF, CVA, CFE, MAFF at 401-752-0518.