Closely Held Business (CHB) / Closely Held Corporation (CHC)

In wealth and financial planning the term “Closely held business” is used to refer to what appears in the US tax code as a “Closely held corporation”. The CHC must meet certain conditions to be distinguished as a CHC for the purpose of tax. CHC classification allows for the use of advanced estate planning techniques, however there are limitations in the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate officers.

To be classified as a CHB/CHC the following conditions must be met:

1) The company cannot be a “personal services corporation”

(A personal services corporation is a C-corp that generates 95% of its revenue from the provision of “personal services”- e.g accounting, engineering, legal, health etc., where its members own over 10% of the stock and should provide not less than 20% of personal services for the corporation.)

2) Has more than 50% of the value of its outstanding stock owned directly or indirectly by 5 or fewer individuals at any time during the last half of the tax year.

Mr. Client is the executor of his fathers estate. The majority of the estate value is held in the business that his father established when Mr. Client was a child. As there is not a lot of cash liquidity in the estate to meet the tax obligations of the estate, and the family company qualifies as a CHC, Mr. Client consults with his wealth manager about whether using Code 6166 would be appropriate to defer the payment of estate tax.