Selling a Business and Charitable Giving
If the COVID-19 pandemic has taught us anything, it’s that people are reevaluating their careers—especially those who are close to retirement. Many professional advisors are seeing a wave of individuals selling their businesses. Using charitable giving strategies, business owners can maximize their after-tax income from the sale while simultaneously making huge impact on their community. Charitable giving also gives individuals the opportunity to infuse mission, purpose, and passion into their lives post-retirement.
Until recently, non-publicly traded assets were a largely untapped source of philanthropic funding. Donors and their advisors were either not previously aware of the opportunity and its benefits, considered the strategy too complex or overlooked it altogether. Today, more donors are using the unique power of these assets to make more meaningful gifts that positively impact them personally and financially.
While many opportunities exist for the sale of a business, a donor advised fund (DAF) is one of the most appealing options for combining business sale planning and philanthropic goals.
Through a DAF, an individual can donate a portion of highly appreciated business shares to the fund and receive an income tax deduction for the fair market value of the contribution. Additionally, the donation minimizes (or eliminates) the capital gains tax of the business shares in a future sale transaction. The proceeds from the sale of the business remain in the DAF for growth, involve family in the distribution of funds, and make impact on their charitable passions for years to come.
While it may be enticing for an individual to use a private foundation, it’s worth noting that contributions of privately held business interests to private foundations may only be deductible up to 20% of the business owners AGI, rather than the 30% limit when contributing to a DAF.
Be sure to consider the following while planning:
Timing is crucial.
If you can execute a charitable plan before the business exit, you can reduce both income taxes and capital gains. Charitable planning conversations with all parties may need to be fast tracked. If you wait until after the sale and contribute the proceeds, an income tax deduction is available for the charitable contribution, but the net income from the sale is reduced by capital gains. To maximize the tax benefits from a charitable strategy, you must initiate the contribution of shares before a legally binding agreement for a future sale. Even if the owner misses the window to donate their privately held interests before the sale is complete, there are still tax-smart strategies that can be deployed as part of an exit strategy.
Organize and understand company documentation and governance structures.
Many times this involves shareholders, members, or limited partnership agreements to ensure that owners have the ability to transfer shares without restrictions. There may be rights of first refusal in favor of the company or other owners that may need to be waived before shares can be donated. Planning ahead allows for understanding and confirmation of the legal parameters in place, and if necessary, document amendments or waivers to allow for the transfer.
Plan for the appraisal.
A qualified appraisal from an independent, third-party is necessary to substantiate the value of the gift for determining the charitable tax deduction. The Community Foundation uses an outside firm that assists with transfer of the assets and the appraisal values. An appraisal must occur no earlier than 60 days before the donation, and no later than the date of the income tax return filing (with extensions). The cost of the appraisal also needs to be put into consideration. The charitable tax deduction may not equal the value the charity receives in the sale of the asset.
Work to set some charitable goals.
Considering personal financial goals of the client, work alongside a philanthropic professional who can help give perspective and insight into the client’s passions and long-term legacy goals. Working with the Community Foundation allows individuals to diversify their philanthropy to many qualified charities over time, giving flexibility to support multiple causes from a single, complex asset gift in the way that works best for the individual.
The Community Foundation has a complex asset strategy and experience in facilitating a wide range of private asset donations and can efficiently process these types of gifts. We can also help facilitate conversations with individuals and families about their current and long-term impact goals. Just as running a successful business requires planning, tax-smart, strategic philanthropy can be a powerful way for clients to ensure optimal personal tax strategies, but can also give a greater purpose to clients in during this new season of their life.