Historically, family owned business owners have always been faced with a difficult tax situation at death. The business can pass to your children but not before paying the 4.5% Pennsylvania inheritance tax. This often required the liquidation of business assets to pay the tax. The loss of business assets made it difficult for many family owned businesses to survive a death transfer.
Pennsylvania has finally recognized the importance of preserving the family owned business for the next generation.
Pennsylvania now has Qualified Family Owned Business Exemption. The exemption requires some hoops to be jumped through to qualify. This makes it very important for a business owner to consult with an attorney who is familiar with the ins and outs of the new rules. Details can be found in 72 P.S. §9111(t).
The business must have been in existence for at least five (5) years prior to death and must pass to a qualified heir. The business cannot have any ineligible owners at the time of death. For example, even if a 1/100 interest is owned by an unqualified person, the exemption is lost for the entire business.
Qualified owners and heirs include husbands and wives, lineal descendants, siblings and lineal descendants of siblings, ancestors and lineal descendant of ancestors. It does not include the spouses of any of these heirs!
As with any tax exemption there are other requirements to be met. Some of these include:
- The business entity must have less than 50 full time equivalent employees;
- Net book value of the business cannot exceed $5,000,000;
- The principal purpose of the business cannot be the management of investments or income producing assets; and
- At the time of death all owners must be qualified heirs.
Once the exemption is qualified for and claimed, the business must remain owned by qualified heirs for seven (7) years following the date of death. If the ownership changes the exemption could be lost. This will result in the payment of the original tax and interest.
The Qualified Family Owned Business Exemption can only be claimed on a timely filed inheritance tax return.
The Qualified Family Owned Business Exemption can be used for sole proprietorships, corporations, limited liability companies, general partnerships and limited partnerships. It cannot be used for assets held in a trust.
For more information on this powerful exemption see the instructions to the PA Inheritance Tax Return and attend the upcoming PBI seminar on “How to Prepare the Pennsylvania Inheritance Tax Return,” in Mechanicsburg (Tuesday, September 15, 2015), Philadelphia (Thursday, October 15, 2015) and Pittsburgh (Wednesday, October 21, 2015).