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Key takeaways:
- Business Valuation determines fair market value for estate and gift tax reporting and compliance.
- You should obtain a defensible valuation to minimize audit risk and substantiate deductions.
- Plan transfers strategically using valuation discounts, timing, and documentation to reduce tax exposure.
- Executors must report FMV at death accurately on Form 706 when estate exceeds filing threshold.
- You can leverage valuations for charitable business gifts to substantiate deductions and meet IRC requirements.
Business Valuation for Estate, Gift, and Tax Planning
When a person transfers assets during their lifetime or after their death, the transfer may be subject to gift or estate tax. In the United States, the Internal Revenue Service (IRS) requires that the fair market value (FMV) of the assets be determined at the time of transfer, and this value is used to calculate the tax liability.
This guidance aligns with established appraisal standards and relevant tax code provisions to support defensible valuations.
Why Accurate Business Valuations Matter for Tax Planning
Accurate valuations reduce the risk of overpayment, support positions in tax disputes, and clarify how business interests should be distributed among beneficiaries.
You need an accurate valuation to make sure you don’t overpay and to prove you’ve paid the right amount in the event of a tax dispute. What’s more, valuations are important for determining how to distribute your assets among beneficiaries, especially if the assets are difficult to value – for example, shares or equity in closely held businesses or real estate.
The U.S. tax code is complex, and tax regulations are frequently modified because of changes in the economy, the political climate, and the needs of society. Specialized guidance covers how pass-through tax treatment can alter valuation approaches and affect fair market value conclusions. A professional valuation will determine your tax liability by calculating the FMV of your assets, including annuities, promissory notes, and closely held businesses that are operating in nature or holding real estate, personal property, stocks, bonds, and bank accounts. These values in turn provide a foundation for your estate and gift planning.
Gift Transfers & Tax Planning Valuations
A gift transfer is the transfer of property, including closely held business interests, promissory notes, and annuities, from one person to another, where the donor does not receive full or FMV in return. Gift transfers are made voluntarily, with no obligation for the recipient to pay the donor for the value of the gift.
In the United States, gift transfers are subject to federal gift tax laws, which are established by Internal Revenue Code (IRC) Section 2512. The federal gift tax applies to gifts made by individuals, and the tax is paid by the donor, not the recipient. (Comprehensive guidance on gift, estate, and GST taxes clarifies filing obligations, exemptions, and planning strategies for legacy preservation.) The gift tax rules specify the annual exclusion amount by year per recipient, and any gifts in excess of the annual exclusion amount may be subject to gift tax. In 2023, you can donate up to $17,000 each to any number of recipients without those gifts being taxed. Recent legislative changes to estate and gift law have altered exemption thresholds and created new planning considerations for business owners.
If you wish to transfer equity or shares of a business as a gift, you’ll need to have a business valuation prepared in order to determine the business’s FMV. A clear and objective determination of value is crucial for planning how much of the business to transfer to the next generation and when to do so – whether during your lifetime or after your death. Not only is a valuation important for your goals, but it might even be required by law, depending on the size of the gift, the jurisdiction in which the gift is made, and the tax implications of the transfer. Targeted valuation guidance addresses audit risks and common pitfalls when gifting equity in rapidly scaling businesses.
Gift tax rules and annual exclusion amounts change over time (sometimes annually), and in addition to the federal rules, some states have their own laws – creating a lot of complexity. Consulting with a tax professional who is familiar with both federal and state gift tax laws is essential to navigating this complicated maze of laws and regulations, assessing whether a gift transfer is subject to gift tax, and determining whether a business valuation is required.
Independent, professionally prepared valuation reports prepared under recognized appraisal methodologies strengthen tax positions and transfer documentation.
Estate Tax Reporting & Valuation Requirements
An estate tax is a tax on the transfer of property at death. Estate reporting refers to the process of reporting the assets and liabilities of a deceased person’s estate, including closely held business interests, promissory notes, and annuities.
In the United States, IRC Section 2031, which sets forth the rules for determining the taxable value of an estate, requires that the value of all property in your gross estate be determined as of the date of your death. Your taxable estate will be that amount less any deductions for such things as mortgages, debts, and property passed to surviving spouses and qualified charities.
The estate’s executor, or personal representative, is responsible for filing the required tax returns and paying any estate taxes owed. The executor must also provide a complete and accurate inventory of all the estate’s assets and liabilities to the government and other interested parties. The FMV of your property must be reported to appropriate government agencies and other parties via Form 706 if the value of your gross estate (with adjustments for taxable gifts and gift tax exemptions) exceeds the filing threshold for the year of death ($12,929,000 in 2023) – another sound reason to obtain a valuation.
A business valuation is an important tool for estate administration, as it is used to determine the FMV of the property for estate reporting purposes. The FMV is used in calculating the total value of the estate, which in turn informs the distribution of assets to beneficiaries.
As noted above, the rules may change over time, so it is important to consult with a tax professional who is familiar with federal estate tax laws to determine whether a business valuation is required for a specific estate.
Executors benefit from retaining contemporaneous valuation documentation prepared using accepted appraisal techniques to support Form 706 reporting and estate administration.
Charitable Contributions & Business Valuation
In the United States, taxpayers can deduct charitable contributions from their taxable income. The general rules for charitable contributions are set forth in IRC Section 170 and require tax filers to include an appraisal summary for any contribution (with some exceptions) that exceeds $5,000.
Specifically, the IRC requires donors to obtain a qualified appraisal prepared by a qualified appraiser under generally accepted appraisal standards. The appraisal must be obtained no earlier than 60 days before the donation, and the contributed property must be received no later than the due date of the donor’s tax return.
If you’re considering gifting a business as a charitable donation, a business valuation will clearly be essential, as it will provide the information you need to calculate the amount of the tax deduction you can take.
A professional, written business valuation report provides evidence of the value of the business at the time of the donation, which is important not only for tax purposes but also for ensuring that the transfer of ownership is properly documented. Further, a business valuation helps ensure that the charitable donation follows all applicable tax laws.
As you consider your estate and gift plans for your business and other assets, it is important to consult with a valuation professional who is familiar with the myriad relevant federal and state laws.
Qualified appraisals that follow professional appraisal standards and include written analysis meet typical IRS documentation expectations for charitable deduction claims.
Frequently Asked Questions
Q: When is a business valuation required for gift transfers?
A: A business valuation is required when a gift involves non-cash property such as business equity or when the transferred value exceeds the annual exclusion and a documented FMV is needed for tax reporting. Professional valuations provide the objective FMV used to calculate any gift tax liability and to support positions in the event of an audit.
Q: Who is responsible for paying the federal gift tax?
A: The donor is responsible for paying any federal gift tax; the recipient does not pay the gift tax. Annual exclusion amounts reduce reportable gifts, but gifts above those thresholds may require valuation and possible gift tax reporting by the donor.
Q: When must an estate file Form 706 and report fair market value?
A: An estate must file Form 706 and report FMV when the gross estate, after adjustments for taxable gifts and exemptions, exceeds the applicable filing threshold for the year of death. The FMV of estate property is determined as of the date of death and should be supported by contemporaneous valuation documentation prepared under accepted appraisal methodologies.
Q: Are appraisals required for charitable contributions of business interests?
A: Yes; contributions of business interests that exceed statutory thresholds generally require a qualified appraisal prepared by a qualified appraiser and proper written documentation. The appraisal must meet IRS timing and content rules to substantiate the deduction amount on the donor’s tax return.
Q: What are the benefits of obtaining a professional business valuation for tax planning?
A: A professional valuation delivers a defensible FMV that reduces the risk of overpayment, supports positions in tax disputes or audits, and clarifies transfer and succession decisions. It also identifies valuation discounts and adjustments that can materially affect tax calculations and estate planning outcomes.
Secure Your Legacy with Expert Business Valuation for Tax Planning
Professional valuation reports offer defensible FMV conclusions that reduce audit exposure and support succession, gifting, and charitable strategies.
Ensure your estate, gift transfers, and charitable contributions comply fully with IRS regulations. Our professional valuation team specializes in providing accurate, defensible valuations to reduce audit risks and protect your family’s wealth.
Your benefits include:
- Precise valuations for estate and gift tax compliance
- Identification and optimization of valuation discounts (DLOM, DLOC)
- Guidance on succession planning and legacy preservation
- Risk mitigation against IRS audits
Fill out the form below to connect with our valuation experts.
Rolf Witt
Rolf Witt specializes in business valuations for estate planning, ESOPs, corporate transactions, and financial reporting. With over five years of experience, he brings deep expertise in valuing privately held businesses across a range of industries and asset classes.
