In Summary
Establishes Fair Market Value: Since private businesses lack a quoted market price, a formal valuation uses IRS guidelines (Revenue Ruling 59-60) to determine an objective “fair market value” based on company earnings, assets, and economic conditions at the time of the gift.
Determines Tax Impact and Reporting: The valuation dictates how much of the $19,000 annual exclusion (for 2025/2026) or the lifetime exemption ($13.99M in 2025; $15M in 2026) is utilized on Form 709, directly affecting the donor’s remaining estate tax limits.
Provides Legal Protection and Future Savings: A professional valuation report satisfies “adequate disclosure” requirements to start the three-year IRS statute of limitations and allows future business growth to occur outside the donor’s taxable estate, reducing long-term tax exposure.
___________________________________________________________________________________________
What is the role of business valuation in gift tax reporting and planning? When an owner gives part of a closely held business to a family member or a trust, there is usually no market price available. Instead, the value depends on the company earnings, assets, outlook and the specific rights tied to the interest, including whether it is a controlling or minority position. A business valuation brings these factors together and determines fair market value at the time of the gift. That number matters because it is the one the tax system uses. It affects how the gift is reported and how much of the lifetime gift and estate tax exemption is used, among other considerations. To help clients, prospects, and others, Hanson & Co has summarized the key details below.
Determining Fair Market Value for Business Gifts
A gift occurs when an owner transfers equity in a company to another person or a trust without receiving full value in return. For a privately held business, there is no quoted market price, so a valuation is often needed to determine what the interest is worth at the time of the transfer.
For gift tax purposes, business interests are valued under the fair market value standard. Fair market value is generally defined as an objective market price, agreed upon by both buyer and seller.
Then, the IRS looks to Revenue Ruling 59-60 as the primary guide for these valuations. The ruling outlines factors that must be considered, including:
- The nature and history of the business
- The company’s financial condition and earnings
- Industry and economic conditions
- The rights attached to the interest being transferred, including control and liquidity
Because no two private businesses look alike, appraisers apply professional judgment within this framework. The goal is to reach a value that reflects the economic reality on the date of the gift and can be explained and supported if reviewed. That valuation is the number that will move into the gift tax reporting process.
The Gift Tax Reporting Process (Form 709)
Once the value of a business gift is determined, the next question is whether it belongs on Form 709, US Gift (and Generation-Skipping Transfer) Tax Return.
- Annual Exclusion — For 2025 and 2026, the annual gift tax exclusion is $19,000 per recipient. Gifts above that amount must be reported on Form 709 unless they qualify for other specific exceptions. To fall under the annual exclusion, a gift must be a present interest. That means the recipient must have immediate rights to the business and the income from it. Many gifts of business interests do not meet that test. Gifts to trusts, in particular, are often treated as future interests, which do not qualify for the exclusion.
- Lifetime Exemption — Separate from the annual exclusion, taxpayers also have a lifetime gift and estate tax For 2025, that exemption is $13.99 million per individual or $27.98 million for a married couple. For 2026, those amounts have increased to $15 million and $30 million, respectively. It’s important to know that taxable gifts reported on Form 709 reduce the remaining lifetime exemption, and the fair market value shown on the return is the amount that counts against that limit. Even if no tax is due today, the reported value affects how much exemption remains for future gifts and, ultimately, for the estate.
Future Planning Considerations
When the gift is reported on Form 709, the IRS generally has three years to examine the valuation. Adequate disclosure includes a clear description of what was transferred, who was involved, and how the value was determined, along with the underlying financial data. A valuation report is a key part of that file. If these disclosure requirements are not met, the statute of limitations may never start. That leaves the gift open to challenge for an extended period, including after the donor’s death.
Additionally, once the transfer is complete, any growth in the value of the gifted business interest typically occurs outside the donor’s taxable estate. That can have an impact on the amount ultimately exposed to estate tax.
Beyond tax considerations, a business valuation can help with resolving disputes and planning for liquidity needs, especially if the business may later need to be sold.
Contact Us
In the end, a formal business valuation can lead to more accurate gift tax reporting, and a better understanding of how a transfer fits into long-term business and family plans. Business owners are encouraged to work with an experienced valuation professional ahead of any business transfer. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.