Selling a business that you put your heart and soul into can be stressful. The complexities related to selling business interests require careful consideration and planning. When considering how to allocate the proceeds, you may want to take a strategic approach, specifically through the donation of privately held business interests. It can be an effective way to achieve tax savings and fulfill philanthropic goals. Here are five things to think about:
1. Prepare to Donate Early
Timing is crucial when donating privately held, non-publicly traded assets to charity. When you work with experts, the legal transfer of business interests to charity can happen without delaying the sale process, maximizing tax efficiency and philanthropic impact.
2. Gather and Review Company Documents
Review company governing documents (e.g., shareholders’ agreements, membership agreements) to check for transfer restrictions that could impact charitable donations. Obtain necessary approvals or waivers to facilitate the transfer. Most limitations are easily managed with some planning.
3. Be Aware of the Appraisal Requirement
A qualified appraisal is required to substantiate the charitable tax deduction. Engage a valuation firm early in the planning process to ensure timely and accurate appraisals. Appraisals can be obtained up to 60 days before the donation and must be completed before the donor’s annual tax return is due.
4. Consider a Charitable Giving Strategy
Understand the options available for donating business interests:
Direct Donation to Operating Charity: Generally deductible at fair market value, up to 30% of AGI, but may require additional approvals and outsourcing of compliance tasks.
Donation to Private Foundation: May have experience handling business interests, but with lower tax benefits, generally deductible at the lower of cost basis or fair market value, up to 20% of AGI.
Donation to Donor-Advised fund: Offers cost and tax benefits, as well as flexibility, simplicity. With deductions up to 30% of AGI at fair market value. DAFs also allow for anonymous grant recommendations.
5. Rely on Experts to Help You
Leverage the expertise of advisors familiar with donating business interests to ensure successful and efficient charitable contributions during a business exit.
External Advisors: Trusted attorneys, accountants, and financial advisors understand your financial situation and future goals. They can guide you through the tax implications and portfolio considerations of your donation.
Expertise at the Charity: Work with recipient charities that have experience handling non-publicly traded assets to ensure smooth transactions and maximize your philanthropic impact.
Conclusion
Donating a business is a rewarding way to achieve tax savings and fulfill charitable goals. By preparing early, ensuring proper documentation, obtaining necessary appraisals, choosing the right charitable strategy, and utilizing expert guidance, you can navigate the process efficiently and maximize your philanthropic impact.
