Closely Held Business Advisor: Giving Back to Your Community: Benefits of Stock Transfers vs. Cash Contributions

As a business tied to your community, you want to maximize the impact of donations to your philanthropic interests. As you consider contributions to your alma mater, church or other philanthropic groups, owners of closely held businesses may gain benefits by donating appreciated stock within an investment portfolio rather than a cash only contribution. In comparison to a cash-only contribution, there is the potential for a greater tax benefit from a portfolio-based donation. Gifting stock also provides the receiving organization with an opportunity for the stock to increase in value over time.

For tax planning purposes, the general rule with this type of contribution is as follows: The deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain property,” the donor does not have to recognize the gain. This is a tax win/win for the donor – enjoy the tax benefit  of a charitable donation but avoid the tax on the appreciation.

Consider the example of two family members who each donate $10,000 to their respective alma maters. Each family member earmarked $10,000 worth of stock in ABC, Inc., a stock both family members purchased seven years ago for $2,000.

The first family member sells enough shares of the stock to equal a $10,000 cash payout. When the contribution is made, the first family member receives a $10,000 charitable deduction, but he must report his $8,000 capital gain on the stock.

The second family member takes a different approach by donating the stock directly to the school. He receives the same $10,000 charitable deduction; however, this strategy eliminates the tax on the capital gain. The college is just as happy to receive the stock and can either sell it for the $10,000 value or hold it and allow it to increase in value.

Making gifts through stock transfer includes a few important parameters. First of all, if the stock has not been held for more than a year, the gift is treated as “ordinary income property” and the charitable deduction would be limited to the stock’s $2,000 cost. If the donation consists of other ordinary income property such as inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock) and personal (not realty). Also be cognizant of what may trigger alternative minimum tax concerns.

How We Help

If you are involved in the ownership of a closely held business and would like to discuss the potential for donations of appreciated stock, Elliott Davis Decosimo’s team of experienced professionals can analyze your overall tax picture for the year. We can discuss the advantages as well as the pitfalls of these tax benefits. Contact your Elliott Davis Decosimo advisor or click here.