The Qualified Family-Owned Business Election (QFOBE) is a provision under the Internal Revenue Code that enables certain family-owned businesses to elect special tax treatment for estate and gift tax purposes. This election can significantly reduce the tax burden on the transfer of a family-owned business from one generation to another.
To qualify for the QFOBE, the business must meet specific criteria, including:
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Ownership Structure: The business must be at least 50% owned by family members. This includes relatives such as parents, children, siblings, and spouses.
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Operational Requirement: The business must have been actively engaged in a trade or business for at least five of the eight years preceding the election.
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Business Type: The election applies to various forms of businesses, including sole proprietorships, partnerships, and corporations, as long as they meet the ownership and operational requirements.
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Election Process: To make the election, the taxpayer must file Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, and indicate the QFOBE on the form.
The QFOBE allows for a valuation reduction of the business when calculating estate taxes, which can lead to substantial tax savings. For instance, if a family-owned business is valued at $10 million at the time of the owner’s death, the QFOBE could potentially lower the taxable estate value to $7 million, depending on the specifics of the election and the business’s operations.
It’s important to note that the QFOBE is particularly relevant in Texas and Houston, where many families operate small to medium-sized businesses that may be passed down through generations. Understanding this election can be crucial for estate planning, ensuring that family businesses remain viable and are not burdened by hefty tax liabilities upon the transfer of ownership.
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