Tax Consequences of Giving a Business to a Family Member

by Fraser Sherman, Demand Media Google

    If you dream of taking over the family business, the dream probably doesn't include buying the company from your parents. If your parent -- or another member of your family -- turns over ownership as a gift, there are no tax consequences for you. The gift-giver may face some stiff taxes, though, unless it's your spouse: Spousal gifts are exempt from gift tax.

    Gift Tax

    The Internal Revenue Service defines a gift as anything you get for less than it's really worth -- and that includes a business. Any year that a relative gives you more than the annual tax exclusion -- $13,000 in 2012 -- she has to report it to the IRS. The IRS adds up the reported amount, year after year: If the total ever tops the lifetime gift-giving limit, your relative has to pay tax. As of 2012, the lifetime limit was $5.12 million, but it's scheduled to drop to $1 million in 2013.

    Impact

    If your father gives you ownership of his $1.5 million business in 2012, he's safely within the lifetime limit unless he's already reported more than $3.5 million in gifts to the IRS. Giving you the company does cut into his lifetime limit for future gifts, but if he sticks to annual gifts of $13,000 per person or less, they're not taxable. If the business is worth more than the exclusion amount, the tax consequences become steeper the more valuable the business is. In 2012, the top gift-tax rate was 35 percent.

    The Unified Credit

    Even if your mother's gift of the business is taxable, she may not have to pay the tax: Each taxpayer has a lifetime Unified Credit -- $1.7 million in 2012 -- which can wipe out gift or estate taxes. If your mother gives you an $8.12 million business in 2012, that's $3 million over the limit. At 35 percent, that's more than $1 million in tax. She can pay the tax or use the Unified Credit to wipe out some or all of it.

    Considerations

    Because the Unified Credit has varied from year to year, calculating how much your father can claim and how much tax he has to pay gets complicated. The tables for figuring it out are in the instructions to tax form 709. You and your father will also have to calculate the value of the business, which may require a professional appraisal. This tells you the size of the gift, and -- if you sell the business later -- how much gain or loss you have on the sale.

    About the Author

    Fraser Sherman is a former reporter with the "Destin Log" newspaper and now freelances full-time. His work has been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life," and he's the author of three film reference books, including "Screen Enemies of the American Way." He specializes in finance and tech articles.