UBIT Implications of Hypothetical Donations of S-Corp Shares

Q. If my client donates shares of an S-Corp to Fidelity Charitable, will the unrelated business income tax (UBIT) vary at the state and federal level?

A. Yes. UBIT rules vary from state to state. All S-Corp donations involve federal UBIT exposure. However, some states will also tax unrelated business income in addition to the federal tax.

Here are two hypothetical examples that illustrate these different calculations:

Scenario A — Hypothetical Calculation with No Separate
State UBIT Tax

  • Donation of $1,000,000 worth of S-Corp shares to Fidelity Charitable.
  • Fidelity Charitable participates in the sale of a company, selling the donated shares for $1,000,000.
  • For the purposes of this hypothetical example, assume there is no ordinary income realized by Fidelity Charitable during its period of share ownership.
  • Further, assume no Fidelity Charitable expenses are factored into the calculation.
  • Finally, assume there is UBIT at the federal level only.
Description Amount
Fidelity Charitable Sale of
S-Corp Shares
$1,000,000
Amount Subject to UBIT $1,000,000
Charitable Deduction 50%

(A trust is able to deduct for its cash contributions to charity up to 50% of its adjusted gross income. Fidelity Charitable, which is structured as a trust, generally contributes to charities annually an amount that is significantly more than 50% of its adjusted gross income, thereby entitling it to reduce its adjusted gross income by 50%.)
Net Income after Charitable Deduction $500,000
Capital Gains at 15% Federal Tax Rate $75,000
Total Federal Tax $75,000
Effective Tax Rate 7.5%

Scenario B — Hypothetical Calculation with State UBIT Tax

  • Donation of $1,000,000 worth of S-Corp shares to Fidelity Charitable.
  • Fidelity Charitable participates in the sale of a company, selling the donated shares for $1,000,000.
  • For the purposes of this hypothetical example, assume there is no ordinary income realized by Fidelity Charitable during its period of share ownership.
  • Further, assume no Fidelity Charitable expenses are factored into the calculation.
  • Finally, assume there is UBIT at the federal level and state UBIT exposure at a rate of 2.5%.
Description Amount
Fidelity Charitable Sale of
S-Corp Shares
$1,000,000
Amount Subject to UBIT $1,000,000
Charitable Deduction 50%

(A trust is able to deduct for its cash contributions to charity up to 50% of its adjusted gross income. Fidelity Charitable, which is structured as a trust, generally contributes to charities annually an amount that is significantly more than 50% of its adjusted gross income, thereby entitling it to reduce its adjusted gross income by 50%.)
Net Income after Charitable Deduction $500,000
Capital Gains at 2.5% State Tax Rate $12,500
Net Capital Gains Less State Taxes $487,500
Capital Gains at 15% Federal Tax Rate $73,125
Total State and
Federal Taxes
$85,625
Effective Tax Rate 8.56%

Please note that federal tax rates contained herein are generally 2012 tax rates and are subject to change. Due to the uncertainty of the tax environment after December 31, 2012, federal tax rates for periods after December 31, 2012 may not be immediately reflected in this article. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice.


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