Owners Of Family-Owned Businesses NEED To Understand These New Laws
What is there to love about 16 minutes of dialogue related to a new addition to the Federal Tax Code?
But, if you tick any of the boxes below, this information is not only compelling, it may be the most valuable use of 16 minutes you will never get back. Thanks to Todd McLees for sharing this important content.
- Family Business Impact — If approved in its current form, section 2704 of the tax code will have a significant impact on Family Business owners. Especially those that have built a business of greater than $10M. This impacts business planning and tax planning, for both gift tax and estate tax.
- Tick-Tock — If you start today, you could get through this process by Thanksgiving. If finalized, the tax code goes into effect on January 1. That leaves you with little time to take action.
- Catch-22— There is a hearing scheduled on December 4th to determine if the regulations will be finalized. If you wait to understand the outcome, you will not have enough time to get the right plan executed.
- The Tax— When equity in a business is gifted to a future generation the value of that ownership transfer is taxed. Today, the tax rate is 40% on the value determined through an appraisal process. In a business valued at $10 million, 10% of that value to be $1 million. That would result in a $400,000 tax bill.
- Discounts — However, that value is discounted by 25–50% for two primary reasons. Firstly, the recipient of a minority interest has no control of the company and that results in a lower valuation. Secondly, those minority interest shares are not easily sold to another buyer, and so they lack marketability. That is another discount. If the discounts amount to 40%, the tax is $240,000.
- 2704’s Effect — Neither discount will survive if Section 2704 is enacted as written. So, we are back to the $400,000 tax bill.
- History — These regulations originated as far back as 1990. But they have consistently been defeated in tax court when well litigated. That led to tax code changes and a broader impact than catching abusers of the discounting system.
- Election Impact — One candidate plans to lower the taxable threshold to $1 Million. That translates to up to 90% of business owners affected. The gift tax and estate tax rates are also likely to increase.
- It’s Good to Know Experts — It can be a challenge, but it is important to take a step back and be thankful for good things that are happening. Getting to know Jeff Billings and Jamey RappisRappis and understand their level of expertise they bring to the table is a helluva good thing.
- The Value of the Family Business Legacy Institute — I met Jeff and Jamey through our FBLI partnership. FBLI is doing great things to help ~40 family business owners in Wisconsin. Member benefits include the expertise that firms like Godfrey & Kahn and CliftonLarsonAllen offer.
If you would like learn more about how you can protect your Family-Owned business from these new rules, call your business tax advisor or reach out Coach Michael Stelter at Advanced Business Coaching, Inc. (262) 293.3166.