IRC Section 2704 Update
As discussed in last month’s newsletter, proposed changes by the IRS to Section 2704 of the Internal Revenue Code would increase taxes for many family businesses. The proposed regulation would effectively eliminate valuation discounts when transferring or gifting ownership interests to family members. As currently written, the regulation would impose a de facto 25 to 50 percent “stealth” tax increase on each transfer or gift, and severely hamper many of these businesses.
The valuation experts at Brinker Simpson & Co. recently attended a valuation industry seminar where they learned there is support in Congress to quash the proposed changes. In the House of Representatives, Republicans have introduced two bills. The first bill, H.R. 6042, would seek to nullify the proposed regulations. The second bill, H.R. 6100, the Protect Family Farms and Businesses Act, would prevent any federal funds from being used to finalize, implement, or administer the regulations.
In the Senate, members of the Senate Finance Committee and other Senators sent a letter to Treasury Secretary Jacob Lew and requested that the proposed regulations be withdrawn. In addition, Senators Rubio (R-FL), Moran (R-KS), and Flake (R-AZ) introduced their version of the Protect Family Farms and Businesses Act with S.3436.
Comments on the proposed regulations by concerned stakeholders need to be provided to the IRS by November 2, 2016. On December 1, 2016, the IRS will hold a hearing to discuss any comments and then finalize the new regulations. It is assumed that the enactment of the new regulations would be effective 30 days after finalization. This means that the window on taking valuation discounts on gifts of ownership interests could close shortly after December 31, 2016.
The impacts to family owned businesses would be significant. At a minimum, these businesses would be forced to delay capital investments or hiring as the available cash will go toward paying an increased tax bill. Worse, these businesses may take on more debt simply to pay the IRS. Finally, business owners may decide to sell or liquidate the business rather than continue on as a family owned going concern. The last outcome is highly destructive, especially of smaller businesses.
If you have an interest in a family-owned business entity, and your estate could be subject to federal or state estate tax, these regulations would have a major impact on you. As mentioned last month, business owners should discuss the potential impact of the proposed regulations with their estate planning attorneys and valuation experts. If you are interested in more information, please contact us.
We hope you enjoyed reading this issue of Business Valuations Letter. Whether you are planning your estate, settling a dispute or selling/buying a business, it is critical to have a sound, professional valuation opinion from a firm that will stand behind its conclusions. Lenders, insurers, the courts and government agencies are increasingly insisting on expert opinions to support claims where value is concerned.
Brinker Simpson's expert valuation consultants specialize in providing confidential business valuation services for closely-held and family owned companies, professional practices and partnership interests. We will work directly with you or one of your other trusted business advisors.
Whether you're planning for the future or dealing with a situation at hand, through careful analysis we will develop an independent, unbiased valuation report for your business.
For any questions regarding this newsletter or any valuation issues or concerns you may have contact our leaders of valuation services who are members of The National Association of Certified Valuation Advisors and Analysts (NACVA):
Michael Simpson, CPA, CVA
Albert A. Lazo, MBA, CVA