Per the Internal Revenue Code, a business valuation is needed to determine a company's value for estate and/or gift tax purposes. We assist business owners and their advisors by providing accurate and defensible business valuation reports. Valuations are also necessary when gifting a portion of stock to charity. For more information on charitable gifting please visit Business Valuation for Charitable Donations.
Hypothetical scenarios that require an expert in business valuation:
Upon a business owners death, his daughter becomes the sole beneficiary of his estate. Because the value of the company is significant, estate taxes must be paid on the transfer. A qualified, independent business appraiser must determine the fair market value of the business.
A business owner is considering several estate planning options. The owner and her advisors would benefit by knowing the value of the company from a qualified business appraiser.
The owners of a privately held company wish to distribute stock to their children. The owners would need a business valuation to determine the taxable burden that this gift would create.
Special considerations for estate and gift tax valuations:
To determine the fair market value of a business, the IRS requires significantly more analysis than a simple calculation. A valuation report must be in accordance with IRS Revenue Ruling 59-60, and comply with the Uniform Standards of Professional Appraisal Practice (USPAP). Business valuations for estate and gift tax purposes are always based on 'fair market value' as the 'standard of value'.
For estate tax appraisals, special consideration should be given to the date of the valuation. This date is typically the date of death or, alternatively, six months after the date of death. Gift tax appraisals are performed as of the gifting date. It is important to note that appraisers can only use financial statements and other information published prior to the valuation date in their analysis.
The percentage of the business interest being valued must also be taken into consideration. When the interest is less than a 100% controlling interest, valuation discounts may be applied which will reduce the tax liability on the estate or gift. For more information on how valuation discounts can influence a company's value, visit our white paper library and read How Valuation Discounts Can Protect Family Wealth.
It is important to note that valuation discounts can be prime targets for IRS scrutiny if they are not properly supported. Fortunately, a significant amount of research has been published which examines valuation discounts and how they apply to minority interests. The proper application of discounts requires an in-depth understanding of the supporting research, as well as a keen understanding of the interest being valued.
Documents required to complete an appraisal for estate and gift tax:
Profit and loss and balance sheet statements for the last three to five years
Interim profit and loss and balance sheet statements for the current year
Federal income tax returns for the last three to five years
Copies of any forecasts or projections
Operating agreement or any other shareholder agreements
