Chloe Quigley, CEPA, Business Exit Planning Advisor
Did you know you can get a charitable tax deduction, avoid estate taxes on a gift, and avoid a capital gains tax in the sale of your business through a donor advised fund (DAF)?
If you’re a business owner thinking about selling, you could be preparing your wallet for the biggest paycheck you’ve ever received. The payoff for all the time you’ve put into your business, the heart, the effort, the relationships you’ve developed and entrusted to grow and nurture your business. It can feel like they’re all winding down in this final, cathartic moment: sale time. You could be transitioning your business in a variety of ways – internally or externally for example. In any way, you are likely hoping to get some immediate reward from your labor, AKA, you are awaiting for its final payday.
There’s not one thing that ruins that payday as much as seeing nearly half of it going to taxes. It’s that avalanche moment near the top of the mountain, and we see business owners quite often frustrated as the value of their company slips away.
Have you thought about the taxes?
Frequently, we see the value of a business get cut many times over throughout a sale process. Advisory fees, sale fees, required business improvements, and third party audits add up as a buyer and seller negotiate their deal. But the biggest hit comes at the end when reliable, old Uncle Sam comes to collect his pay.
We’ve seen business owners cough up millions in taxes. And while death and taxes may be inevitable, there are some considerations you can make in advance of sale to help minimize them.
Do you make gifts to charity? Consider the following.
Most Americans hold only 1-5% of their wealth in cash. Yet, most Americans make their charitable gifts in cash. Meanwhile, there are several benefits of strategically gifting non-cash assets, including complex assets like a business or part of a business interest. You can further leverage your tax benefit by donating these appreciated assets to a donor advised fund.
Complex assets can be real estate, art, collectibles, intellectual property, commodities, private company stock, partnership interests, non-publicly traded stock. The list goes on. Many of which may be involved in transitioning your closely held business.
Does your business have appreciated property? Gifts of appreciated property made to a DAF are deductible to the donor at their current fair market value.
How about your privately held stock? S Corp, C Corp, LP & LLC stock can be donated with an income tax deduction of up to 30% of adjusted gross income (AGI).
How it works: You donate all or a portion of an appreciated asset to your donor advised fund. This is a charitable gift and the proceeds will be available to be gifted to your favorite charities in the years ahead. You will receive an income tax deduction for the contribution and the donor advised fund will sell the asset to the end buyer without paying capital gains taxes because it is a charity.
Here are some considerations you will need to talk with your Financial Advisor and exit planning team about as you approach the opportunity of opening a DAF and donating complex assets.
- Timing
- You can’t already have a binding sale agreement in place.
- You must allow for time for audits and valuation, especially when dealing with real estate.
- Marketability
- The donor advised fund must be confident there will be an end buyer. In particular, the DAF may only hold active business interest for 60 months.
- Organization
- Your Financial Advisor will help you gather your documents and information about your asset, providing a comprehensive checklist that will help verify the eligibility of the donation.
- Your Advisor will then submit the materials to a donor advised fund, adequately addressing any potential concerns or questions.
- Having a team involved to walk you through this process will help you continue to focus on your business and preparing it, you, your employees, and your family for your transition.
Having clarity over how you are going to approach the tax implication of the sale of your business will simplify your planning. Further, donor advised funds can offer tax benefits years after you sell your business, helping provide continuity and routine in your gifting, as well as a legacy for those you love. This can become the funding pool for your future charitable giving throughout your life and even for future generations.
If you are a year out from selling your business and you think that your business’ complex assets, especially those with long term gains, could be eligible to donate, you are well positioned to explore these conversations with your exit planning team. When it comes to planning for more complex donations, the sooner the better.
We can help pave the path to get the answers you need. Reach out to our team today.
Chloe is a non-registered associate of Cetera Advisor Networks.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
Neither Cetera Advisor Networks LLC nor any of its representative give legal or tax advice.
Sources:
Nauman, Spencer, “Donor Advised Funds and Business Charitable Giving,” https://www.tfec.org/donor-advised-funds-and-business-charitable-giving/#:~:text=Donor%20advised%20funds%20are%20a%20simple%20way%20for,business%20gets%20a%20maximum%20return%20on%20the%20donation.
