Gift of a Business Interest
A gift of an appreciated business interest held for more than one year may be well suited to a successful business owner reaching retirement who wants to meaningfully support our work while obtaining a double tax benefit.
A gift of a business interest works like this:
- Working with your attorney, you determine if any restrictions (in the entity documents or state statutes, regulations, or ordinances) would limit how ownership of the business can be transferred.
- You discuss your desired gift with us to ensure we can accept it. Some gifts may be more difficult than others (for example, a business interest that results in unrelated business taxable income can pose a significant obstacle).
- You conduct any relevant review that might be required. For example:
- Conduct a Phase I or Phase II environmental assessment on business-owned real property
- Ensure that the corporation’s assets, both real and tangible, are free of liens with issues
- Ensure there are no clouds on the title to real property
- Ensure there is no pending litigation (or known potential claims) against the corporation
- You obtain a qualified appraisal of the business interest.
- You transfer the entire business interest to Citizens & Scholars.
- You qualify for a charitable income tax deduction for the fair market value of the business interest at the time of your gift (assuming you itemize and subject to limitations).
- You bypass any capital gains tax that would have been due on a sale of the business interest. This can be a highly significant benefit assuming the business interest has a low-cost basis and substantial appreciation.
Consider that a gift of an interest in a C corporation is the most straightforward. S corporations have more to consider, and interests in partnerships or LLCs require consideration of a number of practical issues.
Caution
Use extreme caution if you plan to donate a business interest while planning or negotiating a sale of the business. If planning or negotiations have proceeded to a point where the IRS considers it a prearranged sale, you may be required to pay capital gains tax when we sell the interest.
Donating a partial interest
In most cases, you must irrevocably donate the entire interest to qualify for a deduction. However, if you wish to make a partial interest gift, there are three exceptions that will still qualify for a deduction:
- A contribution of a remainder interest in a personal residence or farm
- A contribution of an undivided portion of your entire interest
- A qualified conservation contribution
Using a donor-advised fund (DAF)
Donating your business interest to a donor-advised fund offers the same double tax benefit as an outright gift and may be an easier transaction. Many DAFs have the resources and expertise to handle this type of asset, from evaluation to processing to the ultimate sale of the asset. Read more about DAFs.
Evaluate the fit.
A gift of a business interest may be a particularly good option to consider if you are thinking of selling your business and you want to:
- Meet significant philanthropic goals
- Qualify for a double tax benefit—a federal income tax charitable deduction (if you itemize and subject to limitations) and no capital gains tax on the appreciated value of the business interest
See how it works.
Claire owns a successful business with privately held stock. Her cost basis is $0 and the stock is currently valued at $27 million (based on a qualified appraisal). Claire decides to use $9 million of stock to support Citizens & Scholars. She could sell the shares (subject to capital gains tax and possibly net investment income tax) and donate the proceeds. However, her advisor recommends considering a direct donation of the stock, which would mean bypassing taxes and making a more substantial gift.
Claire knows several investors who are greatly interested in the stock, but she has not begun any substantive discussions about a sale, nor has she entered into any type of agreement to sell the stock. Claire works with us, her legal counsel, and her advisor to directly donate the stock.
Sale then Donation | Direct Donation to Charity | |
Value of Stock | $9,000,000 | $9,000,000 |
Capital Gains Tax (20%) | 1,800,000 | 0 |
Potential Net Investment Income Tax | 342,000 | 0 |
Actual Gift Amount | $6,858,000 | $9,000,000 |
By donating the stock directly to us, Claire increased her gift by $2,142,000. Following the donation, Citizens & Scholars initiated discussions with the interested investors to arrange a sale of the stock.
Consider your timing.
A gift of a business interest is complicated and requires many steps and the involvement of many different professionals. If you want to ensure that the tax benefits fall within a particular year, start the process as early as possible.
We can help.
Start with us. An initial productive discussion about your asset and goals is imperative to the ultimate success of your gift.
