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How contributing private S-corp stock to charity can maximize charitable giving by minimizing taxes
Do you own S-corp stock in a privately held business that may be sold? Or are you planning to take part in a stock buy-back or corporate redemption program? In either case, consider donating a portion of your S-corp stock directly to a public charity such as Fidelity Charitable, instead of donating the proceeds afterward. Making a contribution of S-corp stock directly offers two key benefits:
1. You’ll generally get an income tax deduction for the fair market value.1
2. Capital gains taxes are eliminated—instead of paying more than 20% in taxes,2 a greater portion of your gift will be available for grants to your favorite charities.
1Fair market value of the stock as determined by a qualified appraisal, held for more than one year.
Fidelity Charitable is a 501(c)(3) public charity, which means it generally will not pay capital gains taxes on its sale of the S-corp stock. That means your charitable gift instantly increases by the amount you save in taxes, which may exceed 20%.2 (As a shareholder, Fidelity Charitable will generally be subject to unrelated business income tax (UBIT) on any income it derives during its period of ownership and on its gain from the sale. Fidelity Charitable pays these taxes with the proceeds of the sale.)
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%, and that the donor originally planned to sell the stock and contribute the net proceeds (less the capital gains tax and Medicare surtax) to charity.
Consider this example:
3Total Cost Basis of Shares is generally the amount of money you have invested in the shares of a particular fund or individual security. It represents the basic dollar amount that, when compared to the price at which you sell your shares, tells you how much of a capital gain or loss you have realized.
4This 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.
5The effective unrelated business income tax (UBIT) rate for Fidelity Charitable in this instance is 10%.
6Fair market value of the stock as determined by a qualified appraisal, held for more than one year.
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 is the amount available for granting purposes after payment of CGF’s unrelated business income tax.
Funding a shelter for victims of domestic violence.
A scholarship fund for survivors, offering hope for generations to come.
John was looking to sell an S-corp that was founded years earlier. One or more private equity firms had expressed interest in buying the S-corp; however, the deal was not complete and terms were still being negotiated. Because John was thinking of making a donation to support a new domestic violence shelter and also would face a large capital gains tax on the sale of the S-corp, his advisor suggested contributing some of his interest in the S-corp to charity before selling the corporation.
John chose to establish a Giving Account at Fidelity Charitable, an independent public charity. Fidelity Charitable conducted due diligence on the proposed contribution and our exit strategy and decided to accept the S-corp shares. John’s deduction was at the appraised fair market value (FMV) of the property on the date of the contribution.
John’s Giving Account was funded with the proceeds of the sale, less the UBIT and other costs incurred by Fidelity Charitable in accepting and liquidating the contributed shares.
Determine whether the contribution prior to the sale would result in an anticipatory assignment of income. If the IRS determines that the sale was prearranged, you may lose the ability to take a tax deduction and be required to pay capital gains tax.
By using a Giving Account, John’s capital gains taxes were eliminated on the contributed shares. He was eligible to take a tax deduction, based on a qualified appraisal and according to IRS regulations, of up to 30% of his adjusted gross income (AGI). (If the tax-deductible value of the contribution was greater than 30% of his AGI, he may have been able to “carry forward” the remaining deduction for up to five years.)
John was able to recommend larger grants from his Giving Account to the domestic violence shelter because he made a direct donation of S-corp shares to Fidelity Charitable. And John’s Giving Account has the potential to grow even more over time in Fidelity Charitable investment programs, thereby allowing him to provide future support.
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.