The Treasury Department this summer blindsided small manufacturers with a proposal that could derail plans by many business owners to pass their companies down to future generations. The proposed regulations—which incorporate some of the most sweeping changes to estate tax policies in the past 25 years—could increase estate and gift taxes on family-owned businesses by an estimated 30 percent or more.
The proposal would change how the IRS values minority interests in family-owned businesses for estate tax purposes. Typically, if a family member owns a minority share of a company, the IRS discounts the value of the shares because the owner lacks control of the business and there’s no ready market for the shares. By limiting the use of minority discounts in family businesses, the proposal would artificially inflate the value of the minority shares and increase the estate tax bill when the owner dies.
That wouldn’t be the case if a nonfamily member owned the same amount of shares in a private company. When the owner died, the IRS would discount the value of the shares for the lack of marketability and control. At the heart of the August proposal is the flawed concept that a minority valuation discount should not apply in family-owned businesses because a family acts as one entity regardless of who actually has control. Indeed, the IRS is unfairly targeting family-owned enterprises based on the erroneous assumption that families operate in complete unanimity.
In response to this proposal, the NAM today—as a member of the Family Business Estate Tax Coalition steering committee—is releasing a business community sign-on letter calling on Treasury Secretary Jacob Lew to withdraw these harmful regulations. In just over a week, this letter drew overwhelming support from across the business community and includes the names of more than 3,800 family-owned businesses and the organizations that represent them.
The overwhelming support for the letter is easy to understand when you consider the impact on family business owners. In commenting on the proposal, one Nevada manufacturer said, “[O]ur wealth, while considered very large by most standards, is not in liquid assets but in building and machinery and inventory that allow us to employ over 400 people. This change would force us to completely rethink the process by which we are hoping to pass not only operational control, but ownership of our company to the next generation. We may not be able to do it.”
Another manufacturer, a second-generation owner of an ongoing company in Florida said, “[C]an you imagine how many small businesses will go under because they counted on the reduced value of minority shareholders to help reduce the inheritance taxes? I can tell you that it will cost hundreds of thousands of jobs because the only way for many to pay the taxes will be by selling the assets of their companies and saying goodbye to employees.”
These proposed regulations would throw the succession and estate planning of thousands of family-owned manufacturers into disarray, increase tax bills and impose additional planning and legal costs on these businesses, drawing valuable resources away from the ability of family businesses to grow, invest and create jobs. It is critical that Treasury withdraw these ill-conceived regulations as soon as possible.