Tax strategy that charitably inclined business owners should be aware of when selling a business

When selling a business, owners who are charitably inclined can get a much bigger charitable bang for their buck if they plan ahead and take action before the sale, rather than making a donation after the sale with the sale proceeds. The key is to make a donation of company stock to a donor advised fund (DAF) shortly before the sale closes. This allows the owner to not only deduct the value of the donation, but also to avoid capital gains tax on the sale of the donated stock. The donor can then direct the funds to charities of their choice over the following years. This strategy is far more tax-efficient than making a donation after the sale or making a donation to the owner’s private foundation.

Privately held business valuations for non-controlling interests are subject to discounts for lack of control and lack of marketability by the IRS. Generally, gifted interests are a non-controlling interest in the business. The lack of control the charity will receive in the business when gifted its interest and the lack of ability to quickly liquidate the interest, creates an inherent lack of control and lack of marketability that make the interest worth less. However, when a business owner is proactive and structures a charitable gift ahead of a planned sale of the business, the following can be accomplished: