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Consider a Business Valuation with the Potential Sunset of the TCJA in 2025

With the potential sunset of the TCJA, business owners should reassess their estate planning strategies, and a business valuation can help. Wegmann Dazet’s Anita Zimmer, CPA, ABV, CFF, explains that because business valuations are crucial in estate planning, the potential sunset of the estate & gift tax limit at the end of 2025 (with its related decrease of the exemption threshold) creates substantial implications for business owners and their estate planning strategies.

Background

Under the Tax Cuts and Jobs Act (TCJA) of 2017, the Federal estate and gift tax exemption was temporarily increased. The tax exemption, with inflation adjustments, will be $13.99 million per individual in 2025.  This exemption increase is scheduled to expire on December 31, 2025, at which point the exemption will revert to pre-TCJA levels with inflation adjustments. The 2026 estate amount is estimated to be between $6.5 to $7.0 million per person, about half the 2025 levels.  Assuming the incoming Congress does not act to stop the sunset, taxpayers can make gifts up to this same estate limit in 2025 before the decrease in the exemption threshold, in order to reduce the future higher tax liabilities for their heirs.

For owners of privately held companies, the estate & gift tax exemption provides an opportunity to transfer their business, or a portion thereof, to family members.  Business valuations play a key role in the gift tax return process when transferring a business interest.  When gifting shares or equity interests in a business, the IRS requires that these transfers be reported on a gift tax return, and the value of those interests must be accurately determined.  For business owners, a valuation provides an objective estimate of their company’s worth, which is vital for making informed gifting decisions about the future.

Importance of Business Valuation in Estate Planning

A valuation is necessary to establish the fair market value (FMV) of the business or interests being transferred, which determines the amount of the gift exemption being used.  The valuation may involve considering discounts for lack of control or marketability, which can reduce the value of the gift and, in turn, the potential tax liability.  This may also allow the business owner to gift a larger portion of his business and remain below the exemption level, or free up a portion of the exemption to gift or bequeath other assets to family members.

Conclusion

Given the scheduled reduction in the estate & gift tax exemption, business owners should act proactively. With the potential sunset of the TCJA, business owners should reassess their estate planning strategies, and a business valuation can help. A comprehensive business valuation, conducted by a qualified expert, can help optimize wealth transfer strategies.  Planning ahead by securing a professional valuation ensures that business owners can make informed decisions, preserve family wealth, and mitigate potential tax burdens before the exemption limit decreases.

Questions about the potential sunset of the estate & gift tax exemption, or questions about a business valuation? Contact us. Our team is experienced and accredited in business valuation (ABV) to assist you with your estate planning.

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