Gift and Estate Tax Business Valuation
A gift and estate tax business valuation is a formal, independent appraisal of a privately held company prepared for federal gift and estate tax reporting purposes. These valuations are designed to comply with applicable IRS regulations and generally accepted valuation standards, providing a well-supported conclusion of value that can be relied upon by business owners, attorneys, and tax advisors in connection with ownership transfers.
Gift and estate tax valuations are commonly prepared in support of IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) and IRS Form 706 (United States Estate Tax Return), as applicable, and may also be used in connection with related ownership transfer and tax filings. A properly prepared valuation helps ensure accurate reporting of fair market value and provides defensible support in the event of IRS review.
Our gift and estate tax business valuations are prepared to determine the fair market value of a business or ownership interest for federal gift and estate tax reporting purposes. The valuation is developed as of a specific valuation date and reflects the rights, restrictions, and characteristics of the ownership interest being transferred.
The analysis is designed to produce a clear, well-supported conclusion of value that complies with applicable IRS regulations and generally accepted valuation standards and can be relied upon by business owners, attorneys, and tax advisors.
METHODOLOGY
The tax business valuation methodology is selected based on the nature of the business, the quality of available financial information, and the characteristics of the ownership interest being valued. One or more generally accepted valuation approaches may be applied, including the Income Approach (capitalization of earnings and discounted cash flow analysis), the Market Approach (guideline transaction method and market multiple analysis), and, when applicable, the Asset-Based Approach (adjusted net asset value). The selected approaches and their relative weighting are fully explained in the valuation report and tied directly to the determination of fair market value.
FINANCIAL STATEMENT NORMALIZATION ADJUSTMENTS
Historical financial statements are reviewed and adjusted, where appropriate, to reflect normalized operating results on a market-participant basis as of the valuation date. Because financial statements are often prepared for tax or internal purposes, they may include non-recurring, discretionary, or owner-specific items.
Normalization adjustments for tax business valuation may include owner and related-party compensation, discretionary or personal expenses, non-recurring or non-operating items, and related-party transactions (including rent), to reflect market-based terms. The resulting normalized financial results represent the earnings a hypothetical willing buyer and willing seller, neither under compulsion and both having reasonable knowledge of relevant facts, would consider in determining fair market value.
DISCOUNTS FOR LACK OF CONTROL AND LACK OF MARKETABILITY
When valuing ownership interests for gift and estate tax purposes, appropriate valuation discounts may apply depending on the characteristics of the interest being transferred and the nature of the underlying company. These discounts reflect the economic realities faced by a hypothetical buyer and seller and are commonly considered in gift and estate tax valuations.
Discounts may include a discount for lack of control when the ownership interest does not confer the ability to control business operations, distributions, or major corporate decisions, and a discount for lack of marketability to reflect the reduced liquidity of ownership interests in privately held companies. The applicability and magnitude of any discounts depend on the specific facts and circumstances of the ownership interest, governance provisions, company characteristics, and relevant empirical market data. All discounts applied are fully explained, supported, and documented within the valuation report.
INFORMATION REQUIRED FROM THE CLIENT
To complete a defensible gift and estate tax valuation, we typically request federal tax returns or financial statements for the past three to five years. For gift tax valuations, this generally includes the most recent available periods prior to the gift date. For estate tax valuations, this typically includes the years leading up to the date of death. In addition, we request a balance sheet as of the valuation date and a completed questionnaire covering the company’s operations, ownership structure, and management. Additional documents may be requested as needed following the initial analysis.
TIMELINE AND DELIVERABLE
Once all required information is received, the valuation process can begin. Most gift and estate tax valuations are completed within 2–3 weeks, depending on the complexity of the business and the availability of information. The final deliverable is a comprehensive written valuation report prepared to support federal gift and estate tax business valuation reporting.