Impact of the Tax Cuts and Jobs Act on Family Business Ownership

Steven E. Staugaitis, CPA, CVA Director, Audit & Accounting, Small Business Advisory Services Group Leader, Family-Owned Businesses Group Leader

The recently-passed Tax Cuts and Jobs Act has brought about a whirlwind of new tax considerations for both families and businesses. With over 1,000 pages of new legislation in the Conference Report, it’s the largest piece of tax reform since the Tax Reform Act of 1986.

Amongst its various provisions, one of the significant changes is the increase in the lifetime estate and gift tax exemption. Section 11061 of the Conference Report, states:

“In the case of estates of decedents dying or gifts made
after December 31, 2017, and before January 1, 2026, subparagraph (A)
shall be applied by substituting ‘$10,000,000’ for ‘$5,000,000’.”

With portability rules still in place, this means that a married couple can now transfer over $20,000,000 worth of family assets to their heirs between now and the end of 2025.

Many family business owners have been thinking about their transition out of their business. And whether a third party sale or a family transfer is right for your situation, an enormous opportunity now presents itself. The past few years have brought about better financial results for most family businesses and that trend seems to have ongoing momentum. This will mean that valuations for these businesses will likely continue to rise. As a result, well-run companies are much more attractive to outsiders and inside transactions may be easier to execute.

The doubling of the exemption has now made estate and gift tax planning opportunities greater than ever. This year, in particular, represents a good opportunity for all family businesses to dedicate some time and thought into looking ahead and doing some planning.

As you go through that planning process, one of the first things you may think about is what your business is worth. We often get questions from our family-owned clients about how to value their company. Using a simple valuation formula – dividing the income stream by its related risk – can help you get a handle on what your business is currently worth. It can also help you understand how to influence the value of your business. This short video takes a closer look at the valuation formula and some of the items that can affect your company’s value.