Donating private stock? Be sure to get a business valuation

Giving Tuesday is a global event that promotes charitable giving and awareness for philanthropic causes. This year, it falls on December 3. While many people donate cash or volunteer for their favorite causes, charities also welcome donations of company stock. Stock donations can offer a tax bonus to donors if the shares have appreciated. However, obtaining a business valuation from a “qualified appraiser” is critical to reap the tax benefits from a donation of private stock.

Tax benefits

If you’re feeling generous this year, you’re not alone. Total charitable giving in the United States is expected to increase by 4.2% in 2024, according to “The Philanthropy Outlook 2024–2025” by the Indiana University Lilly Family School of Philanthropy. This projected growth rate significantly outpaces the annualized average of 1.9% over the past 10 years.

Tax breaks may be available for charitable contributions. But only donors who itemize deductions on their 2024 federal income tax return can deduct donations made by December 31, 2024. Deductions for cash gifts to public charities generally can’t exceed 60% of your adjusted gross income (AGI). (The limit is 30% for cash donations to nonoperating private foundations.) Deductions for donations of long-term capital gains property, including stock, are limited to 30% of AGI for gifts to public charities (20% for gifts to nonoperating private foundations). Contributions exceeding the applicable AGI limit can be carried forward for up to five years.

A taxpayer who itemizes can deduct the fair market value (FMV) of a donation of appreciated corporate stock to a qualified charity, provided the taxpayer has owned the stock more than one year. Donating shares of appreciated stock also allows taxpayers to escape the capital gains hit they’d incur if they sold the shares. Because the charitable organization is tax exempt, it can later sell the donated shares without owing any tax.

Substantiation requirements

Many corporate stock contributions consist of publicly traded shares that are relatively easy to value. But when owners of private businesses contribute stock in their companies, value is often harder to estimate.

To claim the tax deduction for a private stock donation, you must:

• File Form 8283 Section B for a donation valued at more than $5,000,
• Obtain an independent appraisal from a qualified appraiser within 60 days (before or after) the date of the gift if the stock is valued at more than $10,000, and
• Attach the appraisal to your tax return if the shares are valued at more than $500,000.

FMV represents “the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” The stock’s value must be adjusted to reflect any restrictions on the shares. In a business valuation context, this adjustment may be made through discounts for lack of control and marketability.

Detailed appraisal

Business valuation reports for donations worth more than $10,000 must be in writing and include the following details:

• A description of the donation, including the dates of the contribution and valuation as well as the terms of any agreements relating to the use, sale or other disposition of the shares,
• A statement that the reports were prepared for income tax purposes,
• The FMV on the date of contribution,
• The methods used to value the business interest, such as the cost, market or income approach, and
• Any specific data the appraiser used to determine FMV, such as comparable sales transactions.

In addition, the report should identify the business valuation firm and list the appraiser’s qualifications, including background, experience, education and memberships in professional appraisal associations. It’s important to use an appraiser who has earned a business valuation designation from a recognized professional organization and who meets IRS requirements for education and experience. The IRS specifically prohibits do-it-yourself valuations by the donor, donee or related parties.

’Tis the season

To help reduce your risk of IRS inquiry, contact us about providing a comprehensive business valuation. We understand what’s required to substantiate a private stock donation with confidence.

© 2024