The Qualified Family-Owned Business Interest (QFOBI) deduction was part of the Taxpayer Relief Act of 1997. It was subsequently amended upon the enactment of the Internal Revenue Service (IRS) Restructure and Reform Act of 1998.
When the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed, the deduction was repealed, as were the estate tax and generation-skipping tax that were scheduled for 2010. It was repealed because it was believed to be unnecessary due to the larger exemption amounts and the decrease in the estate tax rates between 2001 and 2011. In addition, the deduction was believed by many to be complex, and to place a burden on the heirs.
Then, in 2010, the deduction was reinstated. The QFOBI deduction is a way to reduce your estate tax by permitting you to deduct a “qualified family-owned business interest” from your gross estate.
How Can I Qualify for the Deduction?
In order to qualify for the deduction, you must meet certain requirements:
- The decedent or family members had to have been the owners and active participants in the business for a minimum of five of the previous eight years;
- The business interest must comprise a minimum of 50 percent of the adjusted gross estate of the decedent after accounting for deductible debt, expenses, and taxes;
- The decedent and the decedent’s family must have been the owners of at least 50 percent of the business; or members of two families must have owned 70 percent, while the decedent and the decedent’s family owned 30 percent; or members of three families must have owned 90 percent, while the decedent and decedent’s family owned 30 percent;
- The decedent must have been a citizen or resident of the U.S.; and
- The business must be located in the U.S.
However, more estate tax will be imposed if, within a time frame of 10 years following the decedent’s demise and prior to the qualified heir’s death, the heir does not maintain active participation in the business for three years in any period of time lasting eight years.
What Is the Amount of the Deduction?
The amount of the deduction was first set at $675,000 under Taxpayer Relief Act of 1997. It could not be in excess of $1.3 million when it was added to the applicable exclusion. There was a rise in the exclusion to $1.5 million in 2004 from $625,000 in 1998. Thus, there was a decrease in the maximum amount of the deduction that was allowed, and the deduction eventually disappeared in 2004. The amount of the deduction was $625,000 for decedents whose demise occurred in 2001.
Seeking Legal Advice
If you would like to reduce your estate tax, you should consult an estate attorney. An attorney near you can inform you of the various ways to lower your tax, including the qualified family-owned business interest deduction.