Business owners who donate a portion of their privately held business to a private foundation or 501(c)(3) charitable organization can receive a tax deduction in the amount of the gifted stock. The IRS requires that donors substantiate this amount with a business valuation that has been completed by a 'qualified appraiser'.
Hypothetical scenario that requires a certified business valuation
A couple wishes to gift 10% (a minority interest) of their privately held company to a 501(c)(3) charitable organization. The couple wants to receive the highest tax deduction for their gift, which requires them to structure the gift in a manner that reduces valuation discounts.
A business owner is considering the sale of his business and would like to gift a portion of it to charity beforehand. His charity would receive a larger donation than if he were to give a cash donation from the after-tax proceeds of a sale. (It is important to remember that his donation would need to be completed before receiving a letter of intent from a buyer to acquire the business.)
Special considerations for charitable contribution valuations:
For gifts of closely held stock over $10,000, the IRS requires a 'qualified appraiser' to complete a business valuation for the gift amount. The valuation must be thorough and defensible as these tax deductions are carefully monitored by the IRS. For a complete list of IRS reporting rules click here.
Business valuations for charitable gifts are based on 'fair market value' as the 'standard of value'. They should comply with IRS Revenue Ruling 59-60 as well as with the Uniform Standards of Professional Appraisal Practice (USPAP). They must also be completed no earlier than 60 days prior to the gift and no later than the due date of the tax return.
Charitable gifts of stock are typically minority interests which, in turn, are subject to valuation discounts. Steps can be taken to minimize valuation discounts through the terms drafted in the gift agreement. Providing the gifted interest (which is going to charity) with 'control prerogatives' and the ability to sell the interest back to the donor can reduce discounts, thus maximizing the donors' tax deduction. For more information on valuation discounts click here.
Another important consideration is that the effective date for a charitable contribution valuation is the date the interest was gifted. Business valuations should only reflect information available up to the effective date. Events that occurred after the effective date should not be taken into consideration in the appraisal.
