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How donating business interests before selling a company allows you to give more to charity
Do you own an interest in a privately held LLC or limited partnership that may have a future liquidity event? Donating a portion of your interests to charity ahead of time could result in two major benefits:
1. An income tax charitable deduction for the fair market value1 on the date of contribution.
2. Eliminated capital gains tax; charities are typically exempt from capital gains so the value of your gift won’t be reduced by taxes.
Donate LLC or limited partnership interests using a donor-advised fund such as the Giving Account at Fidelity Charitable and you’ll see even more advantages:
1Fair market value, as determined by a qualified independent appraisal.
Because Fidelity Charitable is a 501(c)(3) public charity, capital gains taxes don’t apply on its sale of the LLC or limited partnership interests you donate. That means your tax deduction AND your gift to charity will be larger. Here’s an example:
2This 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.
3Assumes no Unrelated Business Income Tax (UBIT) and does not take into account limitations on itemized deductions.
Make a meaningful donation to your college alma mater plus provide college scholarships for foster children.
Make a meaningful donation to your college alma mater.
Provide college scholarships for foster children.
Scarlett is an executive at a privately held California-based LLC, which was likely to be sold in the next few months. She owned significant interests in the LLC as one of the initial employees.
As a proud MBA graduate, she wondered if a portion of the LLC sale could be used to support a meaningful donation to her alma mater.
She spoke with her CPA, who suggested it may be possible to use the LLC interests as a charitable contribution. Together they discussed the contribution with Fidelity Charitable and, upon close review of the facts and circumstances, determined that the contribution of the LLC interests could be accepted because a sale was not yet certain to happen.
A few months after the contribution of interests, a buyer was identified and a sale was completed. Fidelity Charitable participated as a seller, and the net proceeds of the sale funded Scarlett’s Giving Account, which she used to recommend a grant to her business school.
And because no capital gains tax was paid when Fidelity Charitable sold its interest in the LLC, she was able to make an additional grant recommendation to another charitable organization, one that provides college scholarships to foster kids.
Scarlett was entitled to a fair market value tax deduction.4 Additionally, she dealt with one charity and one set of paperwork to accomplish the charitable contribution of the business interests as simply and efficiently as possible.
4Fair market value, as determined by a qualified independent appraisal.
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.