A comprehensive guide for CPAs navigating the complex landscape of business valuations for tax purposes. Understand how valuation standards, discounts, and methodologies differ across estate, gift, income, and other tax scenarios.
Fair market value at date of death or alternate valuation date (6 months later). Critical for estate tax calculations and basis step-up.
IRC Section 2031, Reg. 20.2031-1
Fair market value on date of gift transfer. Often involves minority interests with significant discounts for lack of control and marketability.
IRC Section 2512, Reg. 25.2512-1
Various contexts: Section 409A deferred compensation, charitable deductions, bargain sales, and acquisition/disposition transactions.
IRC Sections 409A, 170, 83
IRS frequently challenges estate valuations on:
Court reduced marketability discount from 35% to 20% for family business due to strong financial performance.
$100M+ case involving timber company; court accepted significant discounts for environmental restrictions.
Manufacturing company case where court accepted combined 45% discount for minority and marketability.
Typical ranges: 10-30% for family businesses
Typical ranges: 15-40% for family businesses
Transfer limited partnership interests at discounted values
Transfer future appreciation at reduced gift values
Deferred compensation plans must use reasonable valuation methods:
Business interest donations require qualified appraisals:
| Tax Purpose | Primary Method | Key Considerations | Discount Approach |
|---|---|---|---|
| Estate Tax | Income/Market Approach | Fair market value at death date | Moderate to significant |
| Gift Tax | Income/Market Approach | Maximize discount potential | Maximized within supportable ranges |
| Section 409A | Market/Income Approach | Reasonable method standard | Conservative approach |
| Charitable | Market/Asset Approach | Avoid overvaluation penalties | Moderate discounts |
Different tax purposes require different valuation approaches and may result in different values for the same business.
Provide detailed analysis and market evidence supporting all valuation discounts, especially for gift and estate purposes.
Stay current on Tax Court cases and IRS positions on business valuation issues and discount applications.
Plan valuation timing strategically, especially for gift tax purposes where economic conditions can impact values.
Ensure appraisers meet IRS qualified appraiser requirements and hold recognized credentials (CVA, ASA, ABV, or CPA/ABV).
Apply multiple valuation approaches when appropriate to strengthen conclusions and demonstrate thoroughness to IRS.
Update valuations regularly for ongoing compliance needs, especially Section 409A deferred compensation plans.
Be conservative with charitable contribution valuations to avoid 20% overvaluation penalties under Section 6662.
Partner with a credentialed valuation professional (CVA, ASA, or ABV) who understands the nuances of tax valuations. Get reliable, defensible valuations that comply with IRS requirements and minimize tax exposure.