2 Tax Strategies to Consider Ahead of the 2020 Election

What a Democratic president could do with a stroke of the pen is enforce a section of the Internal Revenue Code that ends valuation discounts for closely held family businesses. The Treasury Department and the Internal Revenue Service under President Barack Obama had proposed regulations that would have disallowed these discounts, which were seen as being overly generous when it came to estate planning.

A few months after taking office, Mr. Trump issued an executive order that told the Treasury Department to withdraw the regulations.

But advisers have pointed out that the statute eliminating valuation discounts remains on the books and is easy to reinstate. “Those regulations were shelved; they weren’t unwritten,” Mr. Pegg said. “You could reinstruct the secretary of the Treasury to propose them again, and they’d become law in the form of regulations.”

Eliminating valuation discounts also has support within the progressive wing of the Democratic Party. “If they have any way to scale back tax rules that benefit the 1 percent, they’re likely to do it,” said Bill Smith, managing director in the national tax office of at CBIZ MHM, an accounting firm. “This is certainly what they’d think of as a ‘1 percent rule.’ It isn’t, in my mind, because it affects all small business.”

The discounts were meant to be used by a private business that was owned by several family members. For example: Five people each own a 20 percent stake in a $100 million company. The difficulty they would have selling a stake to a nonfamily member meant it was not really worth $20 million.

Generally, 30 percent was considered a reasonable discount for this type of illiquidity. Some planners pushed the discount limit to 40 percent and beyond. A few egregious examples drew the ire of policymakers, like ones where a family partnership was created to hold a basket of marketable securities, whose value was easy to ascertain.

Ron Shepard, a small-business owner who lives in Orange County, Calif., is in the process of using various tax structures to pass his family business to his son and daughter. His business, Shepard Brothers, makes cleaners, sanitizers and water treatment products used for food safety.

Article source: https://www.nytimes.com/2020/02/14/your-money/tax-strategies-2020.html?emc=rss&partner=rss