A Window of Opportunity for Family Business Owners

A Window of Opportunity for Family Business Owners, as a small business owner, you may have high hopes that your kids and grandkids will keep your company going well into the future. Along with those hopes may come worries that a substantial estate-tax burden could make it difficult, if not impossible, for the next generation to continue your business. Tax-free Lifetime GiftsMay 2011-P1 Now there’s a window of opportunity for business owners — and others who want to pass significant wealth to their families — to do some serious estate planning. The $5 million gift- and estate-tax exemption that’s currently in place (courtesy of the 2010 Tax Relief Act) makes it possible for individuals to give away as much as $5 million worth of assets during their lifetimes and pay no federal gift tax on their transfers. Family Business Owners Estate-tax Benefit A properly completed lifetime gift not only removes the current value of a gifted asset from the donor’s estate, it also shields future appreciation from taxes. So, for example, a business owner who hasn’t made taxable gifts in the past could give stock worth $5 million to his children and owe no gift tax on the transfers because of his $5 million exemption. If the business does well and the children’s stock is worth $8 million when the owner dies, none of the $8 million value (including the $3 million in appreciation) would be subject to estate tax. The tax savings would be substantial. Limited Time Only Unfortunately, the planning window available under the current tax law is short-lived. Starting in 2013, the $5 million exemption will drop back to $1 million, unless lawmakers act to make it more generous. In addition, the top gift- and estate-tax rate will jump considerably — from 35% currently to 55% in 2013. Talk with Us Since the tax breaks provided under the 2010 Tax Relief Act might not be renewed, business owners who are interested in exploring lifetime gifts and other tax planning opportunities presented by the new law should begin the planning process as soon as possible. Please let us know if you’d like to discuss the new law and your specific situation in more depth. From A to C When it comes to deductions, where they are claimed on a tax return can make a difference. Case in point: Deductions taken on Schedule A (Itemized Deductions) reduce taxable income, whereas deductions taken on Schedule C (Profit or Loss from Business) reduce both taxable income and taxable self-employment (SE) earnings.
  • Instead of classifying the cost of ad space in a program for a charity’s fundraising event as a charitable contribution on Schedule A, it may be deductible as advertising on Schedule C.
  • As appropriate, divide fees paid for preparing Form 1040 between Schedule A (miscellaneous deduction subject to the 2%-of-adjusted-gross-income floor) and Schedule C.
  • Deduct interest paid on a home equity line of credit on Schedule C rather than on Schedule A to the extent the borrowed funds are used for business purposes.
Ensuring that trade or business expenses are properly classified as such on Schedule C can result in overall tax savings. May 2011 p1