Charitable Gifts Can Help Lower Entrepreneur’s Tax Obligations
It has often been said that entrepreneurs are obsessed by the almighty dollar. I guess this is understandable in light of my ol’ uncle Ollie’s observation, “you can’t fund a payroll on good intentions.”
What isn’t often recognized is how generous business owners can be once they’ve “arrived.” A great many philanthropic endeavors are supported by the quiet dollars provided by people who remember the days of scraping to make payroll.
Q: I’ve done quite well with my business, and hope to retire in six or seven years. I’ve been told by my alma mater that we could both benefit from a gift of stock in my company to its endowment. Mine is not a public company with negotiable shares of stock, so how does this work?
A: Your stock has value. If you don’t believe that, wait till you see the bill you - or your estate - will get from the IRS when it is disposed of.
A combination of state and federal estate taxes can ultimately claim in excess of 50 percent of the appreciation you have realized. And, if you sell shares before you die, you’ll be hit first with a capital gains tax. What’s left is then subject to the estate tax at death.
Needless to say, if you are thinking about helping your alma mater, it is better to do so before those taxes kick in. For example, if you originally invested $30,000 in 100 shares of your company and it is now worth $1,000,000, you have a gain of $970,000 that will be subject to these taxes.
If you give just one share to any legitimate charity, it is the same as giving a $10,000 contribution, although the IRS will discount the value a bit since your shares don’t represent control and aren’t marketable. The adjusted value can then be taken as a deduction against ordinary income in the year of the gift.
The university is happy too, since it can now include the dollar value of your gift when calculating its endowment. True, your shares aren’t as readily useable as cash, but the university knows that someday, your heirs, your company, or the eventual purchaser of your business will want this stock and pay cash for it - at its then appreciated market value.
You might consider putting the stock into a charitable remainder trust with the university as your ultimate beneficiary so that your company could begin a buy-back of its shares during the lifetimes of you and your spouse. The trust would use the proceeds from these purchases - or from dividends paid on the shares - to pay you an income during your retirement.
Extra cash beyond this would go to the university’s fund or be used to purchase life insurance on you (or you and your spouse) with the school as the beneficiary. “Second-to-die insurance” is particularly beneficial when a spouse is involved.
Indeed, it might be wise for you to buy wealth replacement insurance on yourself with the cash you save from your income tax deduction. Let your spouse or your kids own the policy and be the beneficiaries. In this way, the amount will be out of your estate for tax purposes.
IRS rules prevent deductibility for a gift that is legally constrained with a contract executed before the donation that mandates a buy-back as we’ve described. Of course, after a “no-strings” gift is made, your firm, your heirs, or the trust can enter into a formal agreement with the university that stipulates the kind of buy-back and income flow that makes sense for all parties.
In the meantime, I wouldn’t worry about the university not agreeing to sell the shares back to your firm sometime in the future. I have yet to seek a grateful charity bite the hand that feeds it.
If you are really cautious, make the gift in pieces over time. It doesn’t take a genius to realize that the gifts will stop if the giver is not getting the “cooperation” he or she deserves.
You can use appreciated real estate to accomplish the same ends. But whether it’s stock or property, it’s a good way to get the tax man to help you fund a worthwhile cause.
Q: I’m in the process of starting a business and need advice concerning the government regulations that will affect me. Is there any publication that will tell me about the things that are unique to the state in which I live?
A: I’ve been particularly impressed with a series of books entitled “Starting and Operating a Business in (name of state)” originated by Ernst and Young, the accounting firm, and published by The Oasis Press in Grants Pass, Ore., (503-479-9464).
It’s a good guide through the maze of state and federal regulations, and is probably available in an edition that pertains to your state.
Information concerning county and municipal regulations can generally be obtained from your local Chamber of Commerce or public library. In Spokane, I’d contact the New Business Information Center at the Spokane Area Chamber of Commerce (353-2630) and the Small Business Development Center (353-2800).
xxxx Paul Willax is the Sandifur Distinguished Professor of Entrepreneurship at Eastern Washington University.