Inherited Business Valuation: Tax & Basis Documentation

Establishing a defensible fair market value for the inherited business is essential for basis step-up, estate tax reporting, and future sales. A professional appraisal is typically necessary.

The IRS requires a defensible number. For estate tax purposes, the business must be valued at fair market value as of the date of death (or the alternate valuation date six months later under IRC 2032). The IRS closely scrutinizes business valuations on Form 706, especially when discounts for minority interest or lack of marketability are applied.

A qualified appraisal is non-negotiable. Treasury Regulation 1.170A-13(c) defines qualified appraisal standards, and the IRS applies similar expectations to estate valuations. Using a certified business appraiser (ABV, ASA, or CVA credential) significantly reduces audit risk.

Your basis depends on this number. Under IRC 1014, your stepped-up basis equals the value reported on the estate return. An undervaluation saves estate tax now but locks in a lower basis, increasing capital gains tax if you sell later.

The tradeoff: Aggressive valuation discounts reduce estate tax but create a lower cost basis, meaning higher capital gains when you eventually sell. Conservative valuations do the opposite. Your CPA and appraiser need to coordinate to find the defensible sweet spot.