Key Takeaways:
- You can save a lot in taxes by strategically planning charitable contributions before selling your business, resulting in substantial tax savings and increased charitable contributions.
- Donating a portion of the business to a charitable account requires careful planning and engagement with wealth managers, CPAs, and attorneys.
- The timing, analysis, and valuation involved make it crucial to consult with professionals well in advance of any business sale.
Can the sale of a company be part of the business owner’s wealth management plan?
Yes, and many business owners aren’t aware of the potential tax savings if they consider doing some charitable planning before the sale occurs. The typical business owner spends a lot of time and money on their business, and often, it can be worth millions of dollars when they are ready to sell. Many don’t have financial advisors to consult because most of their net worth is tied up in their business.
There have been many conversations with business owners who sold their businesses and never knew they could have utilized the sale as part of their charitable planning strategy. It’s possible to donate a portion of the business to a charitable account before—rather than after—the sale, which would avoid capital gains. They tell me they wish they had known about this sooner because of the considerable tax savings.
How does donating a portion of the sale of a business to charity work?
It isn’t simple, and it takes some time and engagement with your wealth manager, CPAs, and attorneys. Essentially, you are donating part of your business before its sale by putting the desired amount of ownership into a charitable account, such as a Donor Advised Fund. There are strict IRS requirements on timing, which is why it is so important to speak with a wealth management professional long before any sale occurs.
We recently worked with a few business owners whose potential tax savings were well into the millions for each partner. This resonates when someone can lower their tax bill and simultaneously give more to charities that are important to them. An analysis of the business and a valuation are required, but if you own a business and are charitably inclined, it’s worth looking into. It’s a tangible value proposition.
What type of professional should business owners consult to properly guide them through this process?
You want to engage a CPA or a wealth management firm that is focused on forward-thinking tax strategies. The firm should know the right questions to ask to build a charitable planning strategy, be well-versed in the charitable world, and have a successful record of implementing strategies to help clients reduce taxes while achieving their philanthropic goals.
What are some other ways I can potentially save on taxes by donating assets to charity?
Contributions to charity reduce your taxable income and lower your tax expense in the current year. However, assets with embedded capital gains are ideal for donating into a charitable account to achieve tax deduction and more.
For example, someone could consider donating shares of Microsoft that were bought many years ago instead of writing a check for the same amount directly to a charity. The logic is the same as with the business contribution. By donating security with an embedded capital gain, a future tax expense is eliminated. When the security (or business interest) is donated to a charitable account, it can be sold and there is no tax liability because the account itself is a tax-exempt charitable organization.
Other illiquid assets are potential candidates as well such as wine collections, art, or antique cars. Once an asset or security is sold in the charitable account, the owner of the account may direct the proceeds at their discretion directly to charities as they see fit over time.
There are many ways to use these charitable accounts to optimize tax savings and give more to the causes that are important to you.
Our firm is committed to empowering business owners with the knowledge and guidance needed to maximize their financial outcomes. Whether you’re exploring the option of donating a portion of your business or seeking advice on tax-efficient contributions of various assets to charity, we are here to assist you every step of the way.
