IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Brian George. Mr. George, is a wealth advisor specializing in charitable contributions in coordination with business sales working for www.charitableadvisorsnetwork.com.
Charitable Opportunities in Coordination with a Business Sale
If you are planning to retire and sell your business you may be feeling overwhelmed, but we can make a case for doing some advance planning to make the process easier, more profitable for you, and more beneficial to the charities you wish to support.
The sale of a company can be complex and intimidating, and concerns over triggering a large capital gains tax can be worrisome. When the company you spent much of your working career building exceeds your wildest expectations, conversations around holistic wealth management and legacy planning must be undertaken all at the same time.
Indeed, there are ways to overcome some of the challenges you may be facing, including a path that benefits you and your community.
Making the case for charitable giving
If you believe that your legacy includes benefiting your community, giving a portion of your company to a charity before selling it will result in less taxes and a significant gain to a charitable organization.
Including a charity in your secession plan is an effective and tax-efficient way to achieve tax savings as well as meet your own charitable giving and legacy planning goals. Just know that when and how this donation is made can represent a significant impact in the taxes you pay, as well as in how much you’re able to benefit your charity of choice.
For many founders, the original cost to start the business may have been low or even zero. Upon the sale of this interest, large capital gains tax may be triggered for the owner. A donation of some of the ownership interest provides a charitable tax deduction for the fair market value of the donated interest and minimizes capital gains exposure for the portion donated and sold by the charity rather than the business owner.
Timing is everything
When donating privately held, non- publicly traded assets to charity, pre-planning conversations must start early — with clients, all advisors, and potential charitable recipients. Business exit opportunities can come together very quickly and, therefore, charitable planning conversations also may need to be fast-tracked.
By working with experts, the legal transfer of business interests to charity can occur without delaying the sale process and all the while maximizing the tax efficiency and philanthropic impact of the transfer.
In these two case studies, the taxes to the business owner will not only be less, but planning well in advance makes it possible for them to provide greater benefit to a charity.
Case Study #1(1)
C-Corporation being Acquired
- Sale: $16M stock sale
- Fair Market Value: $14.4M after valuation discount
- Cost Basis: $0M
- Gift: 10%
GIVER TAX RATES
- Ordinary Income Tax (fed/st): 37%
- Capital Gain Tax (fed/st): 20%
- Net Investment Income Tax: 3.8%
In this case study, as you can see, the business owner who would like to donate to a charitable cause will:
- Pay $914,000 less in taxes than had they not gifted a charity at all
- Benefit a charity by an additional $381,000 by donating a portion of their company before the sale of it
- Gain $82,000 more from the sale by planning ahead and using Option #2 instead of Option #1.
Case Study #2(1)
S-Corporation Implementing Business Succession Plan
- Sale: $9M stock sale
- Fair Market Value: $8.1M after valuation discount
- Basis: $0M
- Gift: 20%
GIVER TAX RATES
- Ordinary Income Tax (fed/st): 37%
- Capital Gain Tax (fed/st): 20%
- Net Investment Income Tax: 0%
In this case study, as you can see, the business owner who would like to donate to a charitable cause will:
- Pay $815,000 less in taxes than had they not gifted a charity at all
- Benefit a charity by an additional $216,000 by donating a portion of their company before the sale of it
- Gain $66,000 more from the sale by planning ahead and using Option #2 instead of Option #1.
I encourage business owners who have charity in mind upon the sale of their business to get the expert assistance they need to make the most of their philanthropy and minimize their own tax obligation.
If you have questions relating to Tax Strategies For Businesses In Transition, the content of this article, or issues related to Charitable Planning, Brian George would welcome the opportunity to talk with you. Mr. Brian George can be reached at 360.340.0601 or brian@charitableadvisorsnetwork.com.
Source: (1) National Christian Foundation
Securities & Advisory Services offered through World Equity Group, Inc., Member FINRA/SIPC. World Equity Group and Charitable Advisors Network are independently owned and operated.
World Equity Group does not provide tax or legal advice.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.