For Business Sellers, Timing Is Key To Maximizing Charitable Gifts by Brian D. Wodar, AllianceBernstein

Typically, business sellers give some of the proceeds of a sale to family and community after the sale is complete. While that may make sense intuitively, it is not as tax efficient as it could be. Here’s a simple example.

Let’s say Mr. and Mrs. Jones sell their business for $10 million, after all fees but before taxes. They get a wonderful payday that should set them up financially for the rest of their lives: After long-term capital gains taxes of 20% and the Medicare surtax of 3.8%, they will have $7.62 million, as the left column in the Display shows.

Timing Maximizing Charitable Gifts Business Sellers

The Joneses want to contribute $1 million to their favorite charity. If they give the money after the deal closes, they would be entitled to a federal income-tax charitable deduction of $434,000. As a result, the $1 million donation would “cost” the Joneses only $566,000, leaving them with net assets of $7,054,000, as the middle column of the display shows.

If instead the Joneses donate 17.25% of the shares of the business to charity before the sale, the charity would receive $1,725,610, or 72% more, when the business sale is completed. As the right column in the display shows, the Joneses would only pay capital gains tax on the $8.27 million they receive from selling the rest of the shares, which would leave them with the same $7,054,000.

There’s no magic or alchemy here. Transferring money to the charity presale creates the additional $725,610 because the Joneses get a larger charitable deduction and pay less capital gains tax.

Einstein also said, “Energy cannot be created or destroyed, it can only be changed from one form to another.” Effective planning can change tax dollars into philanthropic impact. We expect Einstein would approve of this reaction.

*We’ve assumed no state taxes in this example, but the analysis would be directionally similar if state taxes were imposed.

**Results would be directionally similar if they donated the money to a family foundation or a donor-advised fund. However, the income-tax deduction associated with a donation of privately held shares to a private foundation might be limited to cost basis, not asset value, thereby eliminating most or all of the charitable deduction for the Joneses. See Live Once, Plan Often, Bernstein, 2015, page 74.

The views expressed herein do not constitute and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.