By Jason LeRoy ASA, CVA, CFE – Shareholder, Valuation and Litigation Support Group

The COVID-19 pandemic has created a global economic downturn surrounded by future uncertainty.  This has many business owners thinking about how their businesses and assets will be impacted. While estate planning might not be high on everyone’s minds right now, this tragic situation has presented prudent opportunities for individuals to take advantage of low business valuations to minimize estate and gift taxes.

Diminishing Business Valuations

With the exception of a few industries, such as health care, grocery stores and online distributors, businesses across the nation are watching their values dwindle with every day that the COVID-19 virus has the world operating in a shut-down mode. Here are the main factors driving values down:

  • Lower actual or projected revenue and earnings due to virus closures.
  • Increased interest-bearing debt in order to pay employees and other fixed expenses.
  • Decreases in the value of tangible assets such as inventory, machinery, equipment and real property due to changes in market demand and occupancy rates.
  • Increases in discounts for lack of control and marketability due to liquidity issues in the market.

Gift Tax Benefits

Currently, the lifetime gift and estate tax exemption is at an all-time high of $11.58 million per individual and $23.16 million for a married couple. With lower equity valuations, this creates an opportunity to transfer a greater interest in closely held businesses while eliminating or lowering gift tax.

This is particularly enticing to family owned businesses looking to transfer wealth to the next generation. Under the current laws and regulations, when a family business owner transfers an interest in their business to another family member, the value of the transfer is recorded at fair market value. Furthermore, in these situations the value of the business is often reduced for certain allowable discounts. Commonly used discounts include a discount for lack of marketability, control and voting rights.

Planning Opportunities

With a presidential election in the months ahead, there is a lot of uncertainty. Exemption levels may be lowered, gift and estate tax rates may go up and valuation discounts may change or be eliminated depending on the political party chosen to be at the helm. If you are considering making gifts of a minority interest in your business, you should consider having a valuation performed today to support the transfer of wealth to the next generation and maximize the transaction benefits.

If you have any questions regarding how COVID-19 has impacted the value of your business, contact Doeren Mayhew’s valuation experts today.