Will Valuation Discounts Disappear?
The House Ways and Means Bill released on September 13 had provisions related to eliminating discounts on valuing closely held entities that hold non-business assets. Most of us assume that these new rules would not apply to farmers.
However, most of the wealth of farmers is tied up in entities holding farmland, not the actual farm operation. If these entities are considered to hold non-business assets, then the current approximate 35% discount that usually applies when valuing these holdings will likely disappear. This could substantially increase the amount of gift or estate tax value.
Let’s look at an example:
Sally and Jim over their farm career have acquired 1,200 acres of good farmland in Indiana. The current fair market value of this farmland is about $12 million and it is held in their family LLC. They continue to make annual gifts of LLC units to their three children and their spouses plus 10 grandchildren. Under current rules, they are able to discount these minority interest units by 35%. Since there are 16 different donees, Sally and Jim are able to transfer about $738,000 of value in 2021 (16 X 2 X $15,000 / 65%). Beginning in 2022, this will drop to about $480,000 (actually a little higher since the annual gift exclusion will increase to $16,000 per donee).
Also, the Senate Finance Committee may decide to restrict the amount of annual gifting that can be done by farmers. In the case of Sally and Jim, if the annual exclusion increases to $16,000 in 2022, then they will only be allowed to gift $32,000 each instead of the current $369,000. If they exceed $32,000, then the excess is considered a taxable gift and once they exceed $1 million of lifetime gifts, then gift tax will be owed.
The American Institute of Certified Public Accountants has written a letter to both the Senate Finance Committee and the House Ways and Means Committee asking for current rules to remain in place. Our firm is part of that effort. This letter was issued on August 24, 2021 and will be updated to reflect the House Ways and Means proposal to eliminate all discounts on non-business assets which may include farmland.
Progressive members of Congress do not like any discounts on closely held business valuations. Efforts to rein in these discounts have been tried in the past and fail. Let’s hope they fail again.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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