Charitable gifts of closely-held business interests have proliferated over the last two decades, enabling business owners to dramatically increase the amount and impact of their charitable giving, while meaningfully reducing ordinary income, capital gains, and estate taxes. There are two primary planning strategies that business owners employ to capture these enhanced charitable and tax benefits.
The first strategy, and the primary focus of this presentation, involves business owners giving interest in their business prior to an anticipated sale or liquidity event. This strategy allows the business owner to capture a charitable income tax deduction for the value of their business, saving income taxes at their highest marginal tax rate. In addition, upon sale of their business, they are able to avoid or dramatically reduce capital gain taxes on the gifted interest.
The second strategy involves businesses that are not anticipated to sell in the very near future, but nonetheless enable business owners to leverage their generosity by making charitable gifts of interests in their business with the charity holding such interests (generally non-voting interests) longer term. Such gifts are often made on an annual basis with the intent of maximizing the business owner’s annual charitable deductions allowable under the tax code. This strategy allows business owners to capture an immediate charitable income tax deduction, reduce the effective tax rate on annual income allocated to the gifted interest, and avoid or dramatically reduce capital gain taxes upon the eventual sale or liquidation of the business.
These strategies enable business owners to exercise wise stewardship of what is typically their most valuable asset and position them for a meaningful and fulfilling life after the sale of their business pursuing charitable endeavors. Their charitable gifts and subsequent proceeds from the sale of their business can serve as a springboard to serve others and enable business owners to continue to use their business skills, talents, and expertise in the philanthropic arena.