If you’re a small business owner thinking about gifting shares of your company for the year 2022, now is the time to start planning. This post will explain how to calculate the value of a company for gifting purposes and discuss the implications of those valuations.

Several Reasons Why a Business Owner Might Consider Gifting Shares 

Tax planning: Gifting shares in a company can be an effective way to transfer ownership and wealth to the next generation, while potentially minimizing gift and estate taxes.

Succession planning: Gifting shares can also be a way for a business owner to begin transferring control of the company to the next generation or to key employees.

Employee retention and motivation: Gifting shares to employees can be a way to incentivize and reward them for their hard work and loyalty, potentially helping to retain top talent.

Philanthropy: A business owner may also consider gifting shares to a charitable organization as a way to support a cause they believe in and potentially receive a tax benefit.

It’s important to note that gifting shares in a company can have legal and tax implications, so it’s important to consult with your CPA or attorney before making any decisions

Why a Certified Business Valuation is Important

Determining value: A certified business valuation helps to determine the fair market value of the business, which is necessary for tax purposes when gifting shares. This helps to ensure that the correct amount of gift tax is paid, if applicable.

Fairness: A certified business valuation can help to ensure that the gift is fair and equitable to all parties involved. For example, if a business owner is gifting shares to multiple recipients, a valuation can help to ensure that each recipient receives a fair share based on the value of the business.

Documenting the gift: A certified business valuation can provide documentation of the value of the gift for tax and legal purposes. This can be helpful in the event that the Internal Revenue Service (IRS) or other regulatory body questions the value of the gift.

Professional credibility: Using a certified business valuation professional can add credibility to the gifting process and help to ensure that the valuation is thorough and accurate.

Overall, obtaining a certified business valuation can provide important information and documentation that can help to ensure that the gifting process is fair, transparent, and in compliance with relevant laws and regulations.

How to Calculate Business Value for Gifting Purposes

The most common method used to determine the value of a business for gifting purposes is an income approach. This approach looks at expected future cash flows and discounts them back to their present value. The resulting number is an approximation of how much a business is worth today. Other approaches include market comparables and asset-based methods, but these are less commonly used when calculating gift tax values.

Why Valuation Discounts are Important 

Valuation discounts can be important when gifting shares of a business because they can help to reduce the value of the gift for tax purposes. This can be especially important for business owners who are looking to minimize gift and estate taxes.

There are several types of valuation discounts that may be applicable when gifting shares of a business, including:

Minority discount: This discount applies when the shares being gifted represent a minority ownership stake in the company. A minority discount reflects the fact that minority shareholders may have less control and influence over the company’s decision-making processes.

Lack of marketability discount: This discount applies when the shares being gifted cannot be readily sold on the open market. This may be the case if the company is privately held or if there is a lack of liquidity in the market for the company’s shares.

Lack of control discount: This discount applies when the shares being gifted do not come with any voting or control rights.

It’s important to note that valuation discounts are not automatically applied and must be justified based on specific factors related to the business and the shares being gifted. A certified business valuation professional can help to determine which discounts, if any, may be applicable in a particular situation.

Implications of Gifting Shares 

When gifting shares of your company, it’s important to consider the implications that come with it. For starters, gifting shares can affect your tax bill significantly since you may owe gift taxes on any amount over $16,000 per person per year (the 2022 exemption). Additionally, you may want to put certain restrictions in place to ensure that the gifted shares are treated appropriately by recipients. Depending on your situation, there may be other considerations as well; consulting with a qualified financial planner or tax professional is recommended before making any decisions about gifting shares. 

Conclusion: 

Gifting shares can be an effective way to transfer wealth within a family while minimizing taxes and other costs associated with traditional estate planning strategies. However, there are several factors that should be considered before deciding whether or not this route is right for you—including valuation methods, implications for taxation and liquidity, and potential impacts on future financing efforts. As always, it’s best practice to consult with a qualified tax professional or business attorney prior to making any decisions about gifting shares from your business so that you understand all potential ramifications in advance. Reach out to our team today to discuss a proposal and our processes in helping you provide an IRS-defensible Business Valuation for your gifting.

We look forward to working with you!

Sincerely, 
Brandon Hall
Founder/President