Maximize Charitable Impact and Tax Savings with Gifts of Privately Held Stock

For most people, charitable giving means donating cash with a check or credit card. You might be surprised to know that cash gifts can be the least advantageous from both tax-savings and charitable impact perspectives. Leave the cash in your wallet, and learn how you can donate appreciated assets or a portion of your business to a donor advised fund to significantly reduce your taxes while creating a way to support all the causes you care about over time.

Financial advisors and tax experts advise that donating long-term appreciated assets to a public charity will result in the greatest tax-savings as these gifts escape the capital gains tax and are eligible for a federal and state tax deduction. For example, advisors recommend charitable gifts of publicly traded stock, held more than a year, with a low basis.

Real estate is another example of an appreciated asset that can make for a strategic charitable gift. Consider this scenario:

Donor has a vacation home worth $1 million, which she bought decades ago and has an adjusted basis of $0. If she sells the property, she would pay as much as $200,000 in federal capital gains taxes (plus possible state taxes), and (assuming $75,000 of closing costs and brokerage fees), the net amount for charity would be $725,000. If instead she donates the real estate to a charity and that organization sells the home, there is no federal capital gains tax on the proceeds from the sale and the amount for the charity is $925,000. From a tax perspective, a cash donation of $725,000 means a deduction of $725,000. The donation of the home calculates a fair market value donation of $1,000,000.

As a business owner, you also may make gifts of privately held shares of C-Corp, S-Corp, limited partnership, and LLC units to create a charitable fund at a public charity, such as a community foundation, for your corporate or personal philanthropy. The owners of Skyline Chili and the founder of Paycor, Inc. are examples of local business leaders who have taken this approach to meaningfully give back to our region. They encourage other business owners to consider this when thinking about transitioning their businesses to new ownership, whether family members, other shareholders, or outside buyers.

So when is it important to consider gifts like real estate and privately held/closely held business interests? Consider these three scenarios:

1.  Your Company’s Values Align with Giving Back to the Community
   In every community, the most generous people are often local business owners who feel a sense of gratitude to customers and partners whose loyalty led to the success of their brand. In addition, many local companies take pride in the way they give back, and their contributions – whether financial, service hours, or talent share – can become a keystone of their corporate values, internal culture, and regional presence. Especially in the wake of the considerable and enduring challenges caused by the pandemic throughout communities, more businesses are answering the call for support and leaning in to help. And in times of such need for staff recruitment and retention, workers commonly show preference for employers that demonstrate good citizenship, community concern, and investment.
2. You Desire Significant Tax Savings That Yield High Charitable Impact
   Privately owned companies typically start at very low basis and, when successful, can rocket in value. These assets often make excellent charitable gifts as donors can avoid paying capital gains taxes on the donated asset and charities receive property that has increased in value. Donors can receive a significant tax deduction equal to current full fair market value of the gift, as determined by a qualified appraisal. This may occur prior to an acquisition, new funding/investor round, IPO, ESOP sale, or other partial or full exit.
   By donating to a donor advised fund, you can provide impactful support over time to multiple charities and causes about which you care most. Dollars that would have been paid in capital gains tax become dollars that can support nonprofits working to build a stronger community. A donor advised fund is a flexible charitable vehicle that allows donors to receive an immediate tax deduction while maintaining the ability to later decide which charitable organizations to support and when.
3. You’re Thinking About Transitioning Your Business To The Next Generation
   Financial and tax advisors encourage clients to think about transitioning a business many years in advance of an actual sale or transitioning it to the next generation. For charitable business owners, considering their philanthropy as part of their exit is a wise consideration from a tax-savings perspective.

For example, founders with closely held, appreciated C-Corporation stock, who are years away from selling their businesses, can employ a strategy to donate personal stock that the company can later buy back from the nonprofit as a “charitable bailout” or “charitable redemption”. These gifts allow for the transition of the business to new owners over time while creating a charitable impact.

Community foundations like Greater Cincinnati Foundation have dedicated philanthropic advisors who work with individuals, families, and businesses to facilitate conversations and charitable planning. These discussions can position philanthropy as a tool for demonstrating one’s values and passing them to the next generation.

Curious to learn more? Our team at Greater Cincinnati Foundation is happy to talk with you and your tax advisor about the advantages of donating your assets to a donor advised fund. Contact Michele Carey at michele.carey@gcfdn.org to see if this may be an option for you.