Using Charitable Giving to Reduce Capital Gains Tax on a Business Sale

After working for decades building their business and watching it grow through good times and tough circumstances, it's common for an owner to consider retirement and find a new buyer. A major concern for many sellers, however, is the significant tax they may owe on the sale, often referred to as the capital gains tax bite.

Many entrepreneurs may have started their business with little starting capital. The years of growth have turned their business and its holdings into a highly appreciated “capital asset.” Your business is a collection of assets, including:

• Goodwill: the intangible value of a business’ reputation and the value of its customers

• Tangible property: equipment, real estate, etc.

• Intangible property: patents, trademarks, copyrights, etc.

The value of these assets may be determined separately for varied tax rates. How your business is legally structured also plays a major role in the capital gains tax impact, as well as the nature of the sale:

• Asset sale: This is the sale of the varied individual assets of the business.

• Stock sale: This is the sale of the company stock.

• C-corporation: If you sell a C-corporation's assets, the business itself is taxed on the capital gain. Then, when the proceeds are distributed to you as the owner, you may be subject to a second layer of tax, known as "double taxation." Selling the stock of a C-corporation can help avoid this issue.

• S-corporations, LLCs and Partnerships: These are "pass-through" entities, meaning the business's income and losses are passed directly to the owners to be reported on their personal tax returns. 

How Can Charitable Giving Lessen the Capital Gains Tax Bite?

Gifts to charity can help lessen the tax impact provided that the business stock is donated to a charity prior to the business sale being finalized. Some of the charitable instruments that can play a role include:

• Donor advised funds (DAFs): A DAF is a fund that is created specifically for the purpose of charitable giving. A donor provides assets into the fund, enjoying an immediate tax deduction. In the case of a business stock sale, the stock donated into a DAF can then be sold without incurring a capital gains tax.

• Charitable trusts: There are two types of charitable trusts that are most prevalent:

o   Charitable remainder trust (CRT): This trust is known as a split-interest, in which the value of the assets provides an income stream to a donor for a set period of time, and then the remainder of the assets going to charity.

o   Charitable lead trust (CLT): This is also a split-interest, but in reverse. Income payments from the trust go to a charity for a set period of time, and the remaining assets return to the donor or their heirs.

Many sophisticated charitable strategies can use both DAFs and charitable trusts together to greatly lessen the capital gains tax  bite and other tax liabilities that may be present.

A business sale can be a very complex transaction. Legal & tax experts are needed to provide the business seller the necessary guidance for the process to move smoothly.

Smart use of charitable strategies to lessen tax impact is equally complex. That is why the experience & track record of success that Generosity Nexus offers are necessary for any business owner to achieve the best result in having charitable giving become a smart tax strategy. Generosity Nexus is the ally that a business owner can rely on in taking steps from success to significance.Don’t hesitate to schedule an appointment to learn more about how we can help you.