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The potential financial benefits private stockholders may be missing
Do you own privately held C-corp stock in a company that may be sold? Before selling stock in a private C-corporation, consider donating a portion of your holdings to Fidelity Charitable to take advantage of two major benefits:
1. Take an income tax deduction for the fair market value1 of the private company shares on the date of the contribution.
2. Potentially eliminate the capital gains tax2 on the contributed shares by contributing these shares directly to Fidelity Charitable.
There’s also a third benefit of donating privately held C-corp stock to a charity with a donor-advised fund program such as the Fidelity Charitable Giving Account—the opportunity to recommend how the contribution is invested on a tax-free basis, potentially increasing the amount of charitable support over time.
1Fair market value of the stock as determined by a qualified appraisal. Stock must be held for more than one year.
2This assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20%, as well as the Medicare surtax of 3.8%.
When you make an irrevocable contribution of long-term, privately held C-corp stock to Fidelity Charitable, you will generally be entitled to a fair market value deduction3 for the charitable contribution, after which the proceeds become available to recommend grants to qualified public charities from your Giving Account. Because Fidelity Charitable is a 501(c)(3) public charity, capital gains taxes don’t apply on its sale of C-corporation stock you donate. That means your tax deduction AND your gift to charity may be larger. Consider this example:
3The donor will determine the fair market value of the privately held stock by obtaining a qualified independent appraisal, for assets held for more than one year.
4Total cost basis is the original value of an asset, in this case the C-corp stock.
5This assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. This does not take into account state or local taxes, if any.
6Amount of the proposed donation is the fair market value of the appreciated securities held more than one year. This example assumes that Kathy obtained a qualified independent appraisal to determine the fair market value of the securities.
7The discount rate is an estimate reflective of applied discount rates generally seen in the valuations of privately held companies. This assumes a rough range of 5–10% discount for a minority interest and lack of control. Please note that applied discounts could be higher or lower depending on the nature of the interest and the company itself.
8Please note this number refers to the amount of charitable deductions available based on the 8% valuation discount.
9This assumes there is a stock sale and no ordinary income attributed to the sale with a zero cost basis. This also assumes no Unrelated Business Income Tax (UBIT).
Provide tuition for 141 low-income children to attend preschool,10 which is statistically proven to increase a student’s success later in life.11
Tuition for an additional 44 preschoolers.
10Assuming average cost of preschool tuition at $2,160 per child (The Future of Philanthropy)
11Early Childhood Education Zone
Kathy, a successful entrepreneur, was thinking about selling her garden center business to pursue other ventures. Her plan was to donate a portion of the proceeds to pay for preschool tuition for low-income children. A couple of firms showed interest in buying Kathy’s privately held C-corp, but the deal was not complete and terms are still being negotiated.
Kathy knew that because she had built her business from basically nothing over the course of her career, she would be facing a large capital gains tax when the sale was complete.
Her financial advisor suggested that instead of selling the business and donating a portion of the proceeds, she should contribute a 20% minority stake in the business directly to Fidelity Charitable—helping to minimize her capital gains exposure and claim a higher tax deduction. This strategy would also allow Kathy to make a larger donation than she could have made had she only contributed the after-tax proceeds from the sale of her business.
Potential benefits of giving an interest in a company directly to Fidelity Charitable:
This hypothetical case study is provided for illustrative purposes only. It does not represent an actual donor, but is meant to provide an example of how a donor-advised fund can help individuals give significantly more for the causes they care about.