Summary
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?
All businesses eventually require a business appraisal to determine their current economic value. Businesses often conduct such valuations at the onset of a financing or tax event within the business lifecycle. The IRS has specific business valuation guidelines for tax purposes for a business owner.
Business Appraisal for Tax Purposes
A business valuation reflects the current economic worth of a business and not just its book value. 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 the financial health of a business is done by assessing its team, assets, earnings, growth, dividend paying capacity, 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 business 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 Internal Revenue Manuals or 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 information relevant to your privately owned company. For example, they will analyze the value of the business’s assets and liabilities. Additionally, they should consider any revenue, profits, or income gained during the interest period. Finally, the valuator will likely assess the value of the business by considering the market prices of similar assets or recently sold businesses or businesses that 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. You must obtain a valuation by a qualified expert like BA FL|GA|HI to ensure the guidelines are followed. Otherwise, valuators will be required to justify any departures made from such requirements. This might delay the time in which the IRS processes your filing.
Additionally, appraisals must meet other IRS requirements set out by the Internal Revenue Code (IRC) Regulations.
3. Include relevant, personal details
Qualified appraisers are expected to include relevant details—like a business description and terms of sale—during business valuations. Therefore, you should provide such information to your business appraiser to ensure an effective assessment.
Three IRS Business Valuation Methods
The three business valuation methods approved by the IRS are:
- Asset-based approach: This method looks at the company’s assets and liabilities, considering the net asset value.
- . Market approach: This method compares the business to similar businesses that have sold recently.
- Income approach: This method focuses on the income the business generates, projecting future income and converting it into a present value
These methods are generally accepted for valuing businesses and are used to ensure consistency and accuracy in valuations for tax purposes. Business Appraisal FL|GA|HI will value a company using all three methods, select the appropriate valuation method(s), and then explain why that valuation process or method(s) was used.
IRS Business Valuation Guideline Conclusion
Privately owned businesses face various 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 necessary 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. 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.
Aside from ensuring your business is tax-compliant, here are other benefits to getting a business valuation.
Whatever the reason for your business valuation, BA FL|GA|HI is ready to discuss your situation. Contact us, and we’ll discuss our business appraisal services and costs.