Death and taxes, as the old saying goes, are the only things in life you cannot avoid. For some family business owners, the burden of taxes is as close to a death experience as they want in their lifetime.
Often, the family-owned business represents a disproportionate amount of an owner’s estate. In these circumstances paying estate taxes is bad enough, but the real pain for the beneficiaries comes from an IRS requirement that mandates tax payment in full within 9 months after date of death. This time crunch is reason enough for some families to sell off, at liquidation values, their interest in the family business.
Realizing this potential hardship for closely held businesses, the IRS revised the tax codes to allow for some estate tax obligations to occur beyond the normal nine month requirement. For estates that request special consideration and that consist largely of interests in a closely held business(es), there may be some relief in the form of Internal Revenue Codes 6161 and 6166.
| SECTION 6161 | SECTION 6166 | |
| Maximum Period to defer payments | 10 years | 14 years |
| Requirements | Reasonable cause | Business value greater than 35% of adjusted gross estate |
| Interest Rate | Same as deficiencies | 4% on tax attribute to the first $1 million of business, less unified credits. Remainder same as deficiences. |
| Tax Affected | Federal Estate | Tax attributable to qualifying business, less unified credits. |
The IRS also occasionally allows for deferral of estate taxes when a chapter 11 is involved. These potentially helpful codes are only available to those estates that meet established criteria. And of course, the IRS is not doing this just to be nice for there are some tradeoffs associated with this election. However, if you think this may be an option for you; talk with your accounting professional. The money you save may be the lifeline for your family business
