What You Need To Know: Gift & Estate Taxes And Business Transactions In The Era Of Covid-19
By now, most states in the US are open for business to some degree after the COVID-19 lockdowns. Only a handful have yet to reopen their economies. Most are continuing to operate under partial restrictions, but at least many businesses can begin bringing in some sort of revenue.
As the wheels of the economy slowly begin turning again, we wanted to point out a few things that could easily get overlooked while we are–naturally–focused on the pandemic and the chaos surrounding it. In our line of work doing valuations, we see how important getting things right in these areas can be for small business owners. Hopefully, with a little forethought and preparation, you’ll be better equipped if any of these 4 topics apply to your business in the near future:
- ESOPs
- Community Bank Valuations
- Gift & Estate Taxes
- Business Transactions
Last month, we looked at how COVID-19 was likely to affect ESOPs and Community Banks. In this post, we’ll consider its impact on Gift & Estate Taxes as well as Business Transactions.
GIFT & ESTATE TAXES
Now is the time to give!
Business values are down (with exceptions in a few sectors) due to
- loss of revenue,
- uncertain outlook for the future,
- higher debt,
- decreased value of tangible assets,
- and increased discounts for lack of control and marketability.
However, for the savvy business owner these lemons can actually create a good opportunity to transfer more interest in privately owned businesses to the next generation.
The lifetime gift and estate tax exemption is currently at a record high of $11.58 million for individuals and $23.16 million for couples. Everytime you make a gift, you eat into that maximum exclusion. By transferring these lower-value assets now, however, you can use up less of your exemption and have more left for other gifts in the future.
The entire stock market is down from the record highs we were experiencing at the end of 2019; so any private company needing a valuation is going to need to consider this. It is impossible to know what future earnings will be at this point, but they will most likely be down for some period of time. Since this affects the entire company value, now is a good time to make some wise decisions and make a little bit of lemonade out of the lemons.
A word on charitable giving: As state and federal resources are being fatigued, giving to tax-exempt charitable organizations has become more valuable than ever. There are countless groups doing incredible work in underserved communities all across our nation who could use some extra financial help.
Beyond the importance of giving for the sake of serving others, there are also good financial reasons for opening your pocketbook a little wider during this time. The recent Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) encourages charitable giving in a couple of new ways:
- If you are one of the 9 in 10 who claim the standard deduction on your taxes, you may now claim an additional $300 in cash contributions to non-profit organizations.
- If you itemize, the normal charitable deduction limit of 60% of your AGI has been lifted for 2020. (You still can’t give more than 100% AGI, and some charities may not qualify. So see your tax professional for advice.)
BUSINESS TRANSACTIONS
Many companies that were flying high last year simply aren’t worth what they were anymore. Many buyers are “pushing pause” until markets rebound and updated values can be obtained.
Valuations in the climate of a pandemic largely depend on the industry. Some may not recover, while a few are seeing record growth. If business has been good, the anomaly of the economic lockdown can be largely disregarded. All of this affects when it will be a good time to sell again.
Another important thing to consider is the way we will do business going forward. Some things have changed temporarily during “crisis mode”, but some may never be the same again.
For example, face-to-face meetings have been replaced by Zoom out of necessity. (Don’t you wish you had bought some of that stock last year?) However, many industries such as lodging, food, and travel may be greatly impacted as businesses find virtual meetings to be much more convenient and just as productive even after COVID-19 is a bad memory.
These are all things that we are taking into consideration when we perform our appraisals.
We don’t have a crystal ball. However, one thing is certain right now—nothing is normal. In fact, it could be a couple of years before we truly know what the ‘new normal’ is. So hang in there!
While we may be in different boats, we are all in the same storm. As we wait for calmer seas, Southard Financial is here to help you be as prepared as possible to succeed on the other side. Contact us with any concerns you may have in the areas of ESOPs, Community Bank Valuations, Gift & Estate Taxes, or Business Transactions at 901-761-7500 or online at southardfinancial.com.
