Gift of a Business Interest

A gift of an appreciated business interest held for more than one year may be well suited to a successful business owner reaching retirement who wants to meaningfully support Southwestern Medical Foundation or UT Southwestern while obtaining a double tax benefit.

A gift of a business interest works like this:

• Working with your attorney, you determine if any restrictions (in the entity documents or state statutes, regulations, or ordinances) would limit how ownership of the business can be transferred.
• You discuss your desired gift with us to ensure we can accept it. Some gifts may be more difficult than others (for example, a business interest that results in unrelated business taxable income can pose a significant obstacle).
• You conduct any relevant review that might be required. For example:
  • Conduct a Phase I or Phase II environmental report on business-owned real property
  • Ensure that the corporation’s assets, both real and tangible, are free of liens with issues
  • Ensure there are no clouds on the title to real property
  • Ensure there is no pending litigation (or known potential claims) against the corporation
• You obtain a qualified appraisal of the business interest.
• You transfer the entire business interest to the Foundation.
• You qualify for a charitable income tax deduction for the fair market value of the business interest at the time of your gift (assuming you itemize).
• You bypass any capital gains tax that would have been due on a sale of the business interest. This can be a highly significant benefit, assuming the business interest has a low cost basis and substantial appreciation.

Consider that a gift of an interest in a C corporation is the most straightforward. S corporations have more to consider, and interests in partnerships or LLCs require consideration of a number of practical issues.

Evaluate the Fit

A gift of a business interest may be a particularly good option to consider if you are considering selling your business and you want to:

• Meet significant philanthropic goals
• Qualify for a double tax benefit—a charitable income tax deduction (if you itemize) and no capital gains tax on the appreciated value of the business interest

See How it Works

Claire owns a successful business with privately held stock. Her cost basis is $0, and the stock is currently valued at $27 million (based on a qualified appraisal). Claire decides to use $9 million of stock to support Southwestern Medical Foundation. She could sell the shares (subject to capital gains tax and possibly net investment income tax) and donate the proceeds. However, her advisor recommends considering a direct donation of the stock, which would mean bypassing taxes and making a more substantial gift.

Claire knows several investors who are greatly interested in the stock, but she has not begun any substantive discussions about a sale, nor has she entered into any type of agreement to sell the stock.  Claire works with us, her legal counsel, and her advisor to directly donate the stock.

By donating the stock directly to us, Claire increased her gift by $2,142,000. Following the donation, Southwestern Medical Foundation initiated discussions with the interested investors to arrange a sale of the stock.

Consider Your Timing

A gift of a business interest is complicated and requires many steps and the involvement of many different professionals. If you want to ensure that the tax benefits fall within a particular year, start the process as early as possible.

We Can Help

Start with us. An initial productive discussion about your business interest and goals is imperative to the ultimate success of your gift.