Charitable Planning Opportunity for Executives: Donate Private Business InterestsLearn more about this firm
Clients can donate appreciated, non-cash assets to charity as a more efficient, tax smart way to make charitable contributions. Your senior executive and/or entrepreneur clients may find that their most appreciated assets come in the form of illiquid assets, such as privately held C- and S-Corp stock, limited partnerships or LLC interests, often with a low cost basis and significant current market value, resulting in large capital gains taxes when sold.
By donating a portion of these highly appreciated privately held business interests to a public charity (including a donor-advised fund account), clients may be eligible for a full, fair market value income tax deduction for the donation and potentially eliminate capital gains tax liability on the sale, which allows the charities they support to receive the most money possible. Contributions of similar assets to a private foundation would generally be deductible at the lower of cost basis or market value. Such interests are generally appropriate to give to charity when a sale, exchange or buyback program will enable the charity to convert the illiquid interest into cash.
There are important considerations to keep in mind when donating privately held business interests to charity:
- If a sale is expected, the terms of the sale should still be under negotiation. The documentation must not have proceeded to the point at which the IRS would consider it a prearranged sale. That could result in your client bearing the tax liability for any gain on the sale.
- Contributions of privately held stock to a public charity or donor-advised fund account are generally deductible at fair market value on the date of contribution—as determined by a qualified appraisal—whereas such contributions to a private foundation are generally deductible at the lower of cost basis or market value.
- The company's shareholder agreements and other governing documents must be reviewed to understand transfer restrictions, timing and process to complete the charitable transfer.
- For gifts of privately held stock greater than $10,000 or LP/LLC interests greater than $5,000, clients must obtain a qualified appraisal of the shares to substantiate the charitable deduction claimed. Appraisals must be obtained no earlier than 60 days before the date of donation and no later than the due date of your client’s tax return (including extensions) for the year of the gift. Appraisals depend on the facts and circumstances at the time of contribution and may be discounted for lack of marketability and/or lack of control.
- Gifts of indebted interests may trigger negative tax consequences for donors and recipients, including donor tax liability and a reduced charitable deduction. In addition, the deduction for gifts of S-Corp, LP and LLC interests must be reduced by the amount of ordinary income that would have been realized if your client had sold the interest at fair market value on the date contributed. It may be helpful to consult with a tax advisor prior to donating clients’ interests in privately held businesses.
- For S-Corp shares: The charity or donor-advised fund account will generally be subject to unrelated business income tax (UBIT) on its gain from the sale of the shares and on its share of any income generated by the S-Corp during the charity's ownership of the shares. The charity or donor-advised fund provider may use the proceeds of the sale to pay these taxes, and may escrow a portion of the proceeds in a separate account for three years to match the IRS "look back" period, during which the IRS can challenge the cost basis of the shares and the taxes paid.
An executive at a privately held company would like to convert some of her concentrated holding in long-held, highly appreciated shares of the company into cash to fund her philanthropic activities. Her company has a buyback program in place for shares donated to charity. She is a board member of several nonprofit organizations sponsoring programs for disadvantaged youth and these organizations are not able to accept non-cash contributions. She wishes to minimize taxes in order to maximize her gifts to charity.
The executive decides to establish a donor-advised fund account and to fund the account with shares of the company stock. The donor-advised fund takes ownership of the shares and tenders them back to the company as part of the charitable buyback program. The transaction closes within a week, and the executive begins to recommend investments and grants to charities of her choice. She claims a fair market value deduction (as determined by a qualified appraisal).
This is the fifth article in a series on donating non-cash assets to charity. For more information on this topic, read about donating appreciated stock, IPO shares and restricted stock, and real estate. Visit schwabcharitable.org for additional ways to help clients have more impact with their charitable giving while maximizing their tax benefits.
Gifts of appreciated private equity can involve complicated tax analysis and advanced planning. The above article is meant only to be a general overview of some of the considerations and is not intended to provide tax or legal guidance. If you would like to consider a donation, please consult with your tax advisor.
Schwab Charitable accepts contributions of some non-cash assets via a charitable intermediary, with proceeds of the donation transferred to the donor-advised account upon liquidation.
*Hypothetical case study, for illustrative purposes only. Assumes cost basis of $50,000, that the investment has been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate plus the 3.8% Medicare net investment income surtax. Does not take into account any state or local taxes. Assumes no indebtedness associated with the gifted interest.
†Gifts to public charities of private stock are typically deductible at fair market value. For gifts over $10,000, the donor must obtain a qualified appraisal of the value of the stock. Such valuation may be discounted to reflect the lack of immediate marketability and other restrictions. Such discounts vary widely, depending on the nature of the specific restrictions. A 10% discount was assumed for this example. The example assumes full deductibility (gifts of property held for more than one year are generally limited to 30% of AGI with a 5-year carryover of unused amount).
‡ Assumes donor is subject to the maximum 39.6% federal tax and does not account for state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor's AGI.