Business Valuation for Estate Tax Purposes
Determining the value of a business is a critical step in estate planning. It is especially beneficial when calculating estate taxes. For business owners, their company is often one of the largest assets in the estate. The IRS requires a business valuation to determine the tax obligations of an estate properly. In this article, we explore business valuation for estate tax purposes and provide key insights to support effective estate tax planning.
At Peak Business Valuation, we frequently value businesses for gift and estate taxes. We are happy to help you plan for your estate taxes! For questions about a business valuation for estate tax purposes, schedule a free consultation with Peak Business Valuation!
Is a Business Valuation Necessary for Estate Tax Purposes?
A business valuation can serve many purposes for estate tax planning. First, it is usually required when a business interest is part of a deceased person’s estate. The IRS requires a fair market value report for the individual’s assets. If the business is a major part of the estate, an accurate valuation is key to calculating its value and tax obligations. Without a business valuation, the estate may face IRS scrutiny, settlement delays, or disputes among heirs. A formal valuation helps ensure compliance and protects everyone involved.
Estate tax valuations can also be useful when a business owner wants to gift company shares to acquaintances. In these cases, a valuation is still needed to determine fair market value. In addition, an accurate business appraisal helps business owners make informed gifting decisions. It provides essential data for succession planning, tax strategies, and long-term financial decisions. Business valuations can also help prevent disputes or IRS challenges down the road.
Check out Why a Business Valuation is Necessary for Estate Planning to learn more.
When to Value Your Estate
For estate tax purposes, business interests are usually valued on the date of death. However, the IRS allows a later valuation date of about six months if it lowers both the estate’s value and the tax owed. Living business owners should obtain valuations before gifting shares or transferring ownership, as the valuation date must match the gift date. Seeking a business valuation early can prevent surprises and allow time to plan.
To learn more about timing a business valuation for estate tax purposes, reach out to Peak Business Valuation! We are here to provide you with an accurate valuation for estate tax planning. Get started today by scheduling a free consultation with Peak Business Valuation!
Estate Tax Business Valuation Approaches
The IRS requires taxpayers to determine the fair market value of business interests for estate tax purposes. Fair market value represents the amount someone might pay for the estate at that moment. This standard ensures objectivity, regardless of family ties or sentimental value.
Business appraisers use various accepted valuation approaches to calculate fair market value. Common business valuation approaches include:
- Market Approach: The market approach compares the business to similar companies that recently sold on the market. Doing so provides the valuation experts with a sense of the company’s current market value.
- Income Approach: The income approach estimates a business’s value based on its future earning potential. That income is then adjusted to reflect its worth today.
- Asset Approach: This approach values a company by evaluating its assets and liabilities.
At Peak Business Valuation, business appraisers determine which valuation approaches best suit the company. Often, several approaches may be applied for an in-depth analysis. To start the process of a tailored business valuation process, schedule a free consultation below.
Discount Considerations
In estate tax planning, two key discounts can reduce a business interest’s value for tax purposes. Discounts are often applied when the transferring ownership is a minority share or is hard to sell. Below, we discuss common valuation discounts:
- Discount for Lack of Control: Lack of control means the owner cannot make key decisions. Since they are not able to make major business decisions, the interest is worth less.
- Discount for Lack of Marketability: This discount applies when the business shares are hard to sell. For example, shares in a private company often take longer to sell and may not have a ready market.
Both of these discounts lower the interest’s value, which can reduce estate taxes. Business appraisers assess the share and the business to determine if either discount is appropriate.
Role of a Qualified Business Appraiser
A qualified business appraiser ensures the business valuation meets IRS estate tax standards. They demonstrate expertise, credentials, and independence for a fair business appraisal. The IRS reviews valuations closely, so working with a certified business appraiser reduces audit and penalty risks. They also apply proper valuation methods and can defend the final value, adding credibility and accuracy to the estate plan.
Conclusion
For business owners, receiving a business valuation for estate tax purposes is key to effective planning. As part of an estate tax valuation, a business appraiser identifies the estate’s fair market value and potential discounts. This information can help ensure IRS compliance and avoid costly errors. Working with a qualified business appraiser ensures a fair, defensible valuation and a strong estate plan.
Peak Business Valuation has performed thousands of business appraisals. To learn more about business valuations for estate tax purposes, schedule a free consultation with Peak Business Valuation! See also Obtaining a Business Valuation for Taxes for more insight.
