Family Owned Business Deduction
Family Owned Businesses were treated favorably under the IRS statutes, because of the high rate of failure of businesses upon the death of the owner. Without this deduction, estate taxes could force a family to sell the business in an attempt to pay estate taxes.
Under section 2057, the IRS allowed a deduction of up to $675,000 for ownership interest in a family owned business. In otherwords, if you are leaving a family owned business, you can pass up to $675,000 without taxes. This helps alleviate the tax burden on the family so they can avoid selling the business. A family will qualify only if the business is more than 50% of the estate of the decedent.
However, like so many of the IRS's rules, this is a complex rule that requires planning and preparation on the part of the business owner to ensure that the heirs will be able to claim the deduction.
The Tax Court recently disallowed what appeared to be a business owner's succession plan. The business owner made personal loans to the business and then formed limited partnerships to hold the loans. The decedend tried to use the amount of those loans to reach 50% threshhold necessary for the Qualified Family Owned Business Interest (QFOBI) deduction.
The IRS stated that the loans to the business were not countable as an interest in a business under the QFOBI rule for purposes of §2057(b)(1)(C).
The result? The deduction was disallowed and the family will have to pay hundreds of thousands of dollars in taxes.
