What is a Business Valuation for Gift and Estate Tax Purposes?
A business valuation for gift and estate tax purposes is key for preparing a transfer of ownership. While conducting a gift and estate tax valuation, a qualified business appraiser focuses on identifying the business’s fair market value. Fair market value enables business appraisers to reduce tax exposure by identifying discounts for lack of control and marketability. This can include property (like personal, real, or intangible property), annuities, trusts, cash gifts, insurance, and more.
Furthermore, after a business owner passes away, the total value of their estate determines how much they owe in estate taxes. The goal of a gift and estate tax valuation is to calculate the value of assets and supportable discounts to minimize the taxes due. It also helps individuals decide how to divide assets equally among family members, friends, or other beneficiaries.
Peak Business Valuation is a trusted business appraiser, performing appraisals for gift and estate tax issues in the United States. We are happy to help you plan for a valuation for gift and estate planning. If you have questions about business appraisals for gift and estate tax purposes, schedule a free consultation today!
Why is a Business Valuation for Gift and Estate Tax Purposes Important?
Business valuations for gift and estate planning report the value of transferred interests to the IRS. This is separate from valuations used for external transactions or internal planning. Furthermore, assessing gift and estate value is important to avoid overpaying or underpaying taxes. You can also obtain a clear and detailed asset and estate value analysis through this process. As a result, you can ensure each participant receives the proper ownership interest.
Below we break down the common reasons to obtain a business valuation for gift and estate tax purposes:
- Tax Reporting: A gift and estate tax valuation allows business owners to legally claim they owe less tax to avoid overpaying. It can be beneficial to receive a gift and estate valuation every few years to stay updated.
- Ownership Transition: In case of the death of an owner or a partner in a business, it is important to set up a transfer of ownership properly. A gift and estate tax valuation can help you prepare the next inheritor and inform them of any taxes to be aware of.
- Internal Management: Gift and estate management can be helpful to prepare internal management.
How Does a Gift and Estate Tax Valuation Work?
When business appraisers conduct a business valuation for gift and estate tax purposes, they use multiple methods. Each method derives an indication of value from a different perspective and compares results to ensure the valuation is reasonable. The three valuation approaches are:
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- Market Approach: The market approach identifies the value of an asset or business by comparing it to similar businesses. A key tool is using market multiples. To learn more, see What is a Valuation Multiple? and The Market Approach Made Simple.
- Income Approach: The income approach is ideal for predicting future income generation. Business appraisers do this by taking a business’s revenue and profit trends over time to determine potential growth or decline in future earnings. Read more at The Income Approach Made Simple.
- Asset Approach: When using the asset approach, business appraisers add the value of a company’s assets and subtract or adjust liabilities. This is common for asset-heavy businesses, such as manufacturers. See The Asset Approach Made Simple to learn more.
Who Performs Business Valuations for Gift and Estate Tax Purposes?
When conducting a business valuation for estate planning, professional appraisers are required to meet IRS standards. In addition, valuation experts hold the training and certifications to determine the value of different types of property and assets. Peak Business Valuation’s business appraisers focus on personal property, like equipment appraisals, and intangible property, such as a business. In addition, business appraisers follow Revenue Rule 59-60 to ensure the valuation is credible.
Furthermore, if you are gifting an ownership interest in an estate, it is important to have a qualified appraiser conduct the valuation. This helps you prepare for possible problems with taxes in the future. Peak Business Valuation can help you with a gift and estate tax valuation. Schedule a free consultation to start the process!
Common Problems with Gift and Estate Valuations
Valuing ownership interests for business valuation purposes involves applying discounts for lack of control or marketability. These are key issues when valuing closely held business interests. Furthermore, the process of passing a gift or estate to family, friends, or other beneficiaries may be an emotional process. In addition, the ownership transition process can identify issues that were not discussed before gifting or receiving the assets.
Valuation experts like Peak Business Valuation have the credentials to help you determine the best course of action. With a professional business valuation for gift and estate tax purposes, you can be confident that the future of your business will be prepared for future ownership. If you have any questions about valuing an ownership interest for gift or estate tax planning, reach out to schedule a free consultation today!
Conclusion
A business valuation for gift and estate planning is essential to help you minimize potential tax liability. Whether you are giving a gift, planning your estate, or receiving an ownership interest as a gift, understanding the value of what you own or receive is crucial. A gift and estate tax valuation helps ensure taxes are calculated correctly and that property is divided fairly. To ensure you accurately report your taxes, connect with a professional business appraiser.
Peak Business Valuation is a trusted business appraiser in the United States. We can provide you with a business valuation for gift and estate tax purposes. Schedule a free consultation today!
