2020 Tax Planning Opportunity for Your Business

As we begin the fourth quarter of this unprecedented year of 2020, we should be asking ourselves about potential opportunities that are available to help alleviate our future tax burdens. No matter which regime you would prefer, with all the government spending that is currently happening, the piper will eventually need to be paid. Perhaps now is a good time to assess goals and opportunities.

Existing Estate Tax Environment

Currently, every person has an $11.58 million exemption they can transfer from their estate before it is taxed at the federal level. The $11.58 million is exempt from taxation during their lifetime or upon their death. This exemption is scheduled to sunset in 2025, at which time it could revert to the pre-2018 level of $5 million. Many of our states do not currently have an estate tax. Minnesota does have an estate tax for over $3 million in assets, but it has no gift tax. Therefore, for those of us who are residents of Minnesota, we can currently gift $11.58 million during our lifetime with no transfer tax. Upon our death, however, that number goes down to $3 million before tax is imposed at the state level. With the upcoming election, Mr. Biden has indicated that under his tax plan the $11.58 million exemption will go down.

COVID-19 Impacts on Valuation

The COVID-19 outbreak has had a significant impact on the valuation of our businesses. Some businesses such as Amazon are thriving in this new time, while others are barely hanging on. Baby-boomers may be looking at the pandemic as a sign to retire from the family business and let the next generation figure out the aftermath of this new world. That, along with the uncertainty of what our estate tax exclusions may become after the November election have created an opportunity to transfer struggling businesses from one generation to the next with minimal tax consequences. Depending on the business, this might just be the perfect time to transfer those ownership interests to the next generation.

The valuation of a business is more of an art than it is a science, and one of the largest questions one must look at as a valuator is “what is the risk associated with the business?”. What is the risk that income will go down? Will expenses rise? Will it be able to maintain its staffing under the state mandates that are currently in place or that may be coming in future months? As you go through the exercise of answering these types of questions, the valuator will need to assess how much of a cushion the business has before it might need to close its doors. If it needs to temporarily close, will it be able to reopen? Businesses in the hospitality industry, restaurants and catering industries are just a few of the industries that are significantly changed by the pandemic.

In addition, the risk associated with owning commercial real estate is also quite high. With more and more online shopping available, the footprint needed for a storefront may not be the same as it was at the beginning of 2020. One of the ways that we have historically valued businesses is to look at 5 years of financial information. As a valuator in today’s environment, I must ask myself is that historical data even significant right now? Should I take into consideration what this business did historically? Can the business ever reach those numbers again? Does the business have enough of a cushion to weather this storm?

What Should You Do?

What does all of this mean to you, the entrepreneur who has nurtured your business from the beginning but may be struggling under this environment? It may mean that now is an opportune time to assess your business worth. Now might be the correct time to transfer it to the next generation with the least tax impact. With proper planning, you could continue to have an impact on the future of your business without the financial burden of it significantly affecting your estate.

At Boeckermann Grafstrom & Mayer (BGM) we have business valuators waiting to help you assess your specific circumstances. Please contact your BGM professional or complete the Contact Us form. Please visit our Business Valuations Services page to learn more.