Charitable gifts of closely held business interests offer a unique opportunity to accomplish your financial priorities, benefit from substantial tax savings, and provide significant support toAmericans for Prosperity Foundation. If you have owned a business for at least one year which has appreciated in value, and you are now considering selling, making a gift of all or a portion of your ownership interest could make sense for you. The benefits of a charitable gift may apply if you own interests in a partnership, an LLC, an S corporation, or a closely held C corporation. 

Why consider a charitable gift of a business interest?

The sale of a closely held business can leave you with significant tax liability. A gift of all or a portion of your interest may entitle you to:

  • A generous income tax charitable deduction;
  • Avoidance or deferral of capital gain taxes;
  • A source of income for a comfortable retirement; and
  • A gift to support a favorite program or to fund a new initiative at Americans for Prosperity Foundation.

Planning
When considering a gift of a business interest, it is imperative that you do planning before entering into an agreement to sell your interest. The IRS has strict rules around charitable gifts of business interests which must be closely followed to reap the generous tax benefits for this type of gift. Also, agreements among the holders of all the interests may impose restrictions on the transfer of business interests. You should retain competent legal and tax advisors who can partner with our staff in structuring a gift that achieves your objectives and meets all legal requirements to maximize your tax benefit. Americans for Prosperity Foundation will perform our own due diligence for any business interest being offered, as there are liability and tax issues when Americans for Prosperity Foundation accepts a gift of this nature.

Partnership Interests
Outright Gift to Americans for Prosperity Foundation
You will be entitled to an income tax charitable deduction for the fair market value of a partnership interest that you have owned for at least one year and that you donate to Americans for Prosperity Foundation.  If the partnership has underlying indebtedness, each partner is considered to share in that indebtedness. In that case, IRS rules will apply and the transfer of the interest to Americans for Prosperity Foundation will be considered part gift and part sale, which will result in your incurring taxable income along with an income tax charitable deduction. Another reason to engage competent tax counsel is that a gift of a partnership interest to Americans for Prosperity Foundation can trigger income to you.  If your tax basis in your partnership interest exceeds the liabilities of your partnership interest, the IRS treats the gift as if you received cash when you make your gift to Americans for Prosperity Foundation.

Gift to Fund a Charitable Remainder Trust or for a Charitable Gift Annuity
Partnership interests can be used to fund a gift that will pay you or others you designate income, often for life. The most likely gift vehicle would be a charitable remainder trust, which can be structured to accept the partnership interest and to ultimately sell that interest and invest the proceeds in a diversified investment portfolio to achieve both philanthropic and financial objectives.

S Corporation Stock
Outright Gift to Americans for Prosperity Foundation
A change in the tax law effective in 1998 permits charities to owns shares of S Corporation stock. Despite Americans for Prosperity Foundation being tax-exempt, Americans for Prosperity Foundation must pay taxes on its share of the income generated by the S Corporation stock, and on the total capital gain (including gain attributable to the donor’s ownership) when the shares are ultimately sold by Americans for Prosperity Foundation. A gift of S Corporation stock is possible after performance of due diligence and an assessment of the tax impact of the gift to our organization.   

Gift to Fund a Charitable Remainder Trust or for a Charitable Gift Annuity
Tax laws do not permit S Corporation stock to be owned by a charitable remainder trust that pays income for life to the trust beneficiaries.  However, the S Corporation can contribute appreciated assets to a fixed term charitable remainder trust (not to exceed 20 years) in which case the income tax charitable deduction would belong to the S Corporation. The charitable deduction would flow through to the shareholders in proportion to their ownership interests, as would the tax consequences for the trust distributions if the S Corporation is designated as the income beneficiary. The S Corporation, as donor, can also designate the individual shareholders as the income beneficiaries of the charitable remainder trust.

Americans for Prosperity Foundation can accept S Corporation stock to fund a charitable gift annuity. Before agreeing to such an arrangement, Americans for Prosperity Foundation will need to perform due diligence to ensure that the tax consequences and the obligation to make annuity payments are financially sound for Americans for Prosperity Foundation.  Such an annuity will typically defer its first payment to allow Americans for Prosperity Foundationto convert the shares to cash.

C Corporation Stock
Outright Gift
Americans for Prosperity Foundation is permitted to accept a gift of C Corporation stock without the tax consequences that would be incurred from accepting shares of S Corporation stock. You will receive an income tax charitable deduction for the fair market value of the shares you donate. However, the goal of Americans for Prosperity Foundation will be to sell the shares and convert the shares to cash. There are several ways this can occur, including the purchase of the shares by the company ESOP, a corporate redemption of the shares, or the purchase of shares by other shareholders such as other family members or children.  A gift of some of the shares followed by a redemption or purchase by other shareholders can effectively change the ownership percentages in the corporation, an issue to be considered by your professional advisors.

Gift of Shares to a Charitable Remainder Trust or for a Charitable Gift Annuity
You can donate all or a portion of the shares of a C corporation to a charitable remainder unitrust that will make payments to you and/or others designated by you. You will receive a partial income tax charitable deduction. You will also avoid capital gains taxes when the shares are sold by the trust. IRS imposes restrictions on certain classes of individuals who will be prohibited from purchasing the shares of stock owned by the trust, which individuals are deemed “disqualified persons.”

It is possible to donate your shares of a C corporation for a charitable gift annuity, provided our Gift Acceptance Committee approves the gift. There are financial considerations when we accept a gift of an illiquid asset for a charitable gift annuity, as we may be required to initiate annuity payments before the asset has been sold and funds made available for these payments.

Qualified Appraisal
If the value of the business interest donated to Americans for Prosperity Foundation exceeds $5,000, to substantiate your charitable deduction you will be required to obtain a qualified appraisal meeting IRS requirements. You are advised to consult your professional advisor so that you are following such requirements.

Conclusion
If you are considering selling your business, engaging in business succession planning, or estate planning, making a gift of all or a portion of your interest to Americans for Prosperity Foundation may be worth considering. The key is advance planning.

 

This information does not constitute legal or tax planning advice. Please consult with your legal or financial advisor.