A recent article in the Wall Street Journal made an observation about the “stealthy wealthy”: “Behind a paycheck, the largest source of income for the 1% highest earners in the U.S. isn’t being a partner at an investment bank or launching a one-in-a-million tech startup. It is owning a medium-sized regional business.”
Additionally, more than 90% of small business owners have supported charities and community activities in the last year. But many people are not familiar with the benefits and mechanics of giving closely-held business interests to charity. When properly executed, this technique can be extremely effective in achieving financial and philanthropic goals.
Here are three very important components to consider regarding Closely-Held Business Interest:
- Donating closely-hold stock to a fund at Waco Foundation is generally more effective than giving to a private foundation due to several key differences in how the IRS treats these gifts. When a donor makes a gift of closely-held stock to a community foundation, the donor can typically deduct the full fair market value of the stock, up to 30% of adjusted gross income and also avoid paying capital gains tax on any appreciation. By contrast, if a donor makes the same gift to a private foundation, the deduction is limited to cost basis up to only 20% of AGI, which is a significantly less favorable outcome.
- Planning ahead is crucial for this type of gift to ensure the fund at the community foundation will receive the full donation and the deduction won’t be thrown out, as the gift and the sale must be genuinely separate events.
A part of the planning ahead process is securing a proper valuation. Valuation is a critical factor in any type of tax or estate planning strategy, and this is no different.
As always, please reach out to Waco Foundation anytime when the topic of charitable giving arises. We are honored to be your home for charitable giving.
