Businesses eventually require a business appraisal to determine their value. The IRS has specific valuation guidelines for gift and estate tax purposes.
Business Valuation for Gift and Estate Taxes
Certified Business Valuation for IRS Purposes
Table of contents
- Business Valuation for Gift and Estate Taxes
- Certified Business Valuation for IRS Purposes
- How do you value a business for estate tax purposes?
- Business Appraisal for Tax Purposes
- Succession Planning Needs a Business Valuation
- Section 4.84.4 Business Valuation Guidelines
- IRS Business Valuation Guideline Conclusion
How do you value a business for estate tax purposes?
All businesses eventually require a business appraisal to determine their current economic value. Often, conducting such valuations are at the onset of a financing or tax event within the business lifecycle. The IRS has specific business valuation guidelines for taxing purposes.
Business Appraisal for Tax Purposes
A business valuation reflects the current economic worth of a business. The appraisal approach may vary among evaluators and industries. However, the factors included in such an analysis tend to be the same. Overall, the calculation of financial health of a business is by assessing its team, assets, earnings, growth, and losses within the context of its specific industry.
Many companies requiring a valuation, however, are private. Unlike those publicly traded in the stock market, these companies do not publicize market information about their businesses for all to see. The Internal Revenue Service (IRS), thus, has an established set of guidelines. Expert appraisers must consult these while evaluating the worth of these businesses.
The Internal Revenue Manual (IRM) refers to the guidelines created by the IRS. Experts use it to properly appraise a private company. A qualified appraiser must adhere to these recommendations during various valuations, which tax filing purposes can then utilize.
Succession Planning Needs a Business Valuation
For example, business owners planning for succession will require a valuation, following the IRM guidelines. This is to determine what their tax liability would look like for estate tax planning needs. This is important because the IRS audits a portion of the estate and gift tax returns filed every year involving the valuation of privately held assets. Obtaining a business valuation service from an expert appraiser like BA FL|GA|HI will be critical to strategizing business opportunities, complying with IRS requirements, and navigating a potential tax audit.
Additionally, individuals interested in giving privately held company stock to charity will also be required by the IRS to obtain a valuation following IRM standards. This is because the donation must be assessed at its fair market value. Why? To determine the charitable deduction that the individual can expect from their taxable income.
Section 4.84.4 Business Valuation Guidelines
Regardless of the particular reason, the IRS will require you to obtain a qualified appraisal that follows Section 4.84.4 Business Valuation Guidelines in the IRM. That specific section provides the requirements that expert appraisers like Business Appraisal FL|GA|HI will follow when appraising your privately owned company.
There are a few different ways to conduct valuations while complying with the requirements suggested by the IRS. Here is some insight into the general process that qualified appraisers tend to follow while conducting a valuation in accordance with the guidelines provided by the IRS:
1. Analyze specific information about your company
Appraisers will first review specific pieces of information relevant to your privately owned company. For example, analysis of the value of the business’s assets and liabilities. Additionally, there should also be consideration of any revenue, profits, or income gained during the time period of interest. Finally, the valuator will likely assess the value of the business by considering the market prices of similar assets or recently sold businesses or are in the process of selling.
2. Ensure complete compliance with IRS guidelines
Valuations of privately owned companies produced by appraisers for tax filing purposes must follow the requirements laid out by the IRS in the IRM Section 4.48.4. It is especially important that you obtain a valuation by a qualified expert like BA FL|GA|HI to ensure that the guidelines are adhered to. Otherwise, valuators will be required to justify any departures made from such requirements. This might delay the time in which your filing is processed by the IRS.
Additionally, appraisals must meet other IRS requirements set out by the Internal Revenue Code (IRC) Regulations.
3. Include relevant, personal details
Qualified appraisers will be expected to include relevant details — like a business description and terms of sale — during valuations. So be expected to provide such information to your appraiser to ensure an effective assessment occurs.
IRS Business Valuation Guideline Conclusion
Privately owned businesses face a variety of scenarios that impact their growth, finances, and success. Regardless of how your particular business is faring, understanding its true value and worth can be extremely beneficial and needed when performed for a purpose that results in tax filing.
For example, appraisal information of your privately owned business will be needed when disclosing charitable contributions made above $5,000 in the IRS gift tax Form 709. Additionally, you might also need the valuation when completing the Schedule F estate tax form 706 to establish an estate.
The IRS expects your appraiser to have earned a recognized designation from an accredited institution like the National Association of Certified Valuators and Analysts® (NACVA®). Thus, be sure to seek an appraisal from a qualified expert like those employed by BA FL|GA|HI with the CVA designation. So that such certification can also be demonstrated in your filing.
Whatever the reason for your business valuation, BA FL|GA|HI is ready to discuss your situation. So contact us and we’ll talk about our business appraisal services and costs.
Aside from making sure your business is tax-compliant, here are other benefits to getting a business valuation.