Treasury Withdraws Regulations Burdening Family-Owned Business

Date: October 12, 2017

The Treasury Department will withdraw regulations to Section 2704, which made estate or gift taxes more costly to family-owned businesses.

Last week, the Treasury Department announced plans to withdraw, repeal in part, or fully dismantle eight tax regulations. In particular, the Treasury Department will withdraw a key regulation proposed by the Obama administration that would have overburdened family-owned businesses.

Obama-era changes to Section 2704 of the Internal Revenue Code would have limited valuation discounts and increased costs for family members looking to transfer their business to another relative. Under Secretary Steven Mnuchin, the proposed rule is expected to be formally withdrawn and the “valuation discount” for family owned businesses’ estate or gift taxes will remain intact, according to the Association for Convenience & Fuel Retailing.

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The Internal Revenue Service currently determines that a minority share isn’t exactly valued equally as a majority share because of a lack of controlling interest, and so a “valuation discount” is given to family-owned businesses for these tax objectives. The proposed change to this from the Obama administration would have eliminated this discount and taxed family businesses at higher rates. Many within the business community fought back against the regulation, calling it unrealistic and burdensome. So, the Treasury Department’s announcement to withdraw the rule can be hailed as a success for family-owned businesses.

Family-owned businesses are mostly small businesses. A recent Credit Suisse report found that family-owned businesses make more money and out-perform non-family owned businesses, according to the Washington Post. The report indicated that family involvement in daily operations or board membership is a key factor in a business’ strong performance, even more so than the amount of stock family members held. The success of family-owned business seems to be tied to the idea that family members “are in it for the long term and aren’t afraid to forego quarterly earnings targets to fund research and development for the future.”

Since family-owned businesses are outperforming other businesses, it’s important to ensure that no regulations cripple their growth in order stimulate the national economy.

 

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