Inherited Business: Evaluating Your Options

If you haven't decided what to do with the business yet, a CPA can model the tax outcomes of keeping, selling, or winding down. The choice significantly affects your stepped-up basis benefit.

Time-sensitive elections expire. A Section 754 election for partnerships must be filed with the partnership return for the year of death. An S corporation held in a trust may need a QSST or ESBT election within specific windows. Entity classification elections under the check-the-box rules have their own deadlines. Missing these permanently limits your options.

The estate administration period buys some time. While the estate is being administered, the estate itself can be the business owner. Estates are eligible S corp shareholders and valid partnership partners. But this period is not indefinite -- the IRS expects estates to close within a reasonable time, typically within two years.

Ongoing operations create facts on the ground. If the business keeps running during your indecision, income is being generated, tax obligations are accruing, and your participation level is being established. These facts affect whether income is passive or active, which matters whenever you do decide.

The pitfall: Indecision is itself a decision. By not acting, you're defaulting to the status quo -- which may mean paying taxes you could have avoided, missing elections that would have saved money, or letting the business deteriorate while it could have been sold at stepped-up basis value.