Gifting - Strategies for Closely-Held Business Owners

Strategies for Closely-Held Business Owners
In addition to the gifting opportunities to charities (discussed in section 79), closely held business owner's can gift assets and/or income to family members in an S corporation or Partnership as a pass through to shareholders. Gifts of shares can be made to younger family members over the years to take advantage of the annual exclusion – which results in income being shifted. If the gift is to a child under the age of 24, "kiddie tax" rules may apply (a disadvantage of conduit income). In addition, this strategy, to pass income through, is best fit for S corporations that are capital sensitive (e.g., manufacturing plant, warehouse, E-ray equipment etc.) and not suitable for S corps that are service related (e.g., CPAs, attorneys, consultants, etc.) because these businesses cannot shift income (tax trap).

A Family Limited Partnership (FLP) operates among members of a family (spouses, children, and trusts established for those persons). If a partnership among family members is a genuine partnership, it will be treated tax-wise the same as any other partnership. The family partnership is a technique used as a means to shift income from parents to children or other family members. FLPs can qualify for various valuation discounts if the following requirements are met:

  • Income and tax benefits must be distributed according to each owner's percentage in the partnership.
  • The general partner(s) may be paid for personal service to the partnership.
  • Capital must be "a material income-producing factor"; income cannot come from personal services of the general partner.

Also, the use of a gift-leaseback can be used when a business-owning parent wishes to establish a program of gifting but is held back by lack of available assets (except for business assets). The parent gives the business assets (fully depreciated) outright or in trust to a lower-bracket family member, and leases the asset back for use in his or her business. The parent can continue using the asset, take a deduction for the lease payment and still enjoy all the other advantages inherent in gifting.

Gifts of Present Interest & Gifts to Non-citizen Spouses


Related Articles
  1. Economics

    What is a Partnership?

    A partnership is an organization where two or more owners operate a business.
  2. Budgeting

    How to Talk to Your Family About Christmas Gift Budgets

    Talking Christmas gift budgets with family members can be hard, but having the talk will help you stay on track financially.
  3. Personal Finance

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  4. Financial Advisors

    How Income-Shifting Strategies Can Help Cut Taxes

    There are many ways that your clients can move money or other assets to relatives in order to reduce their tax bills. Here's a primer on best practices.
  5. Entrepreneurship

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  6. Investing

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  7. Entrepreneurship

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  8. Your Clients

    How to Gift Your Way to Lower Estate Taxes

    Estate planning is not just for inheritance. High net-worth individuals, who plan properly, can gift their money and save on taxes.
  9. Entrepreneurship

    What New IRS Rules Will Do to Partnerships, LLCs

    The pending IRS rule changes for partnerships and LLCs could drastically curtail the way assets within them are valued and taxed. Here's why.
  10. Entrepreneurship

    Taxes in California for Small Business: The Basics

    Understand the tax implications of running a small business in California, and learn which state taxes apply based on business type.
RELATED TERMS
  1. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business ...
  2. Publicly Traded Partnership - PTP

    A business organization owned by two or more co-owners, that ...
  3. Partnership

    A business organization in which two or more individuals manage ...
  4. IRS Publication 541

    A document published by the Internal Revenue Service (IRS) that ...
  5. Income Splitting

    A tax reduction strategy employed by families living in areas ...
  6. Gift In Trust

    An indirect bequest of assets to a beneficiary by means of a ...
RELATED FAQS
  1. What's the difference between limited liability partnership and general partnership?

    Learn the differences between general partnerships and limited liability partnerships; each type has unique traits, benefits ... Read Answer >>
  2. What form do small business partnerships use to report business expenses?

    I've heard that sole proprietorships report business expenses on a schedule C form.  Read Answer >>
  3. What's the difference between general, limited and joined venture partnerships?

    Read about some of the important differences between general partnerships, limited partnerships and joint venture arrangements ... Read Answer >>
  4. Do companies have to pay back their paid-up capital?

    Learn what business structures are available to entrepreneurs, and learn the process for making the most appropriate selection ... Read Answer >>
  5. If you have a house that is under your company name and you want to sell it back ...

    The answer to this question really depends on the type of legal entity your business is operated through. Businesses may ... Read Answer >>
  6. Which terms should be included in a partnership agreement?

    Understand what specific terms should be included in a business partnership agreement and how each affects the partners in ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center