Sunday, November 15, 2015

IRS eyeing tax changes on succession planning

If family members don't want to inherit a family business, there are considerations on how the firm is sold to new owners. All of these have different impacts on taxes -- a mistake can cause a family's tax liability to double.

“This was a quiet year for tax code changes,” said Darren Case, shareholder and tax group leader at Tiffany & Bosco PA. “With many boomers headed for retirement, there is a lot of money moving from one generation to the next.”

Case said the IRS has threatened to look into valuation discounts, a tax planning tool that discounts valuations when a company business is moved from one generation to the next.

"Selling a business requires buyer and seller to agree how much money goes into which bucket," said Diane Thomas, president and designated broker of Premier Sales, Inc., a business brokerage. "Some items are taxes as capital gains, others as ordinary income."

Changing succession planning rules could have a big impact on a family business, he said.
“Today, it’s possible to gift or sell a share in a family business to the next generation and take a 30 percent to 45 percent discount on the value. That essentially lets the next generation acquire ownership of $1 million in value for $700,000 or less,” he said.

Just passing a family business to the next generation may not lead to either an enduring business or a sustained estate. Case said that a Nov. 11 article in Barron’s reported that in the second generation, 70 percent of family wealth and family unity has been squandered.

“The article said that by the third generation, more than 90 percent of wealth has been lost,” he said.
This is a cautionary tale about tax liability for family businesses if the family is not planning on the business passing to the next generation, he said, adding that succession planning must clarify how the business is to be transferred.

“A lot of business buyers want to buy assets instead of the business in order to avoid unknown liabilities,” he said. “If an owner sells this way, the family is looking at a federal and state tax liability that could approach 45 percent.”

Without proper planning, selling assets can more than double the taxes on the sale when compared to selling the business. Case said that selling the business generates capital gains tax, which is a 15 percent or 20 percent tax liability, depending on the family’s tax bracket.

Thomas said the liability can be managed by how the sale price is categorized.
Timing also is a factor, Thomas said. "We have deals slated to close at 12:01 a.m. on January 1 (2016). That kicks the taxes for the seller into next year and gives the buyer a full year of the business to manage taxes."