As the sale of your business approaches, you may naturally be consumed with the terms of the deal, including negotiating a successful price. But focusing on — and planning for — additional aspects of the sale, such as capital gains and other taxes, can make a profound difference in how much of a reward you realize after taxes. 

Gifting shares of your company prior to its eventual sale, rather than bestowing a portion of the after-tax proceeds later, may be a strategy that can help reduce your income tax burden, while contributing to the causes that mean the most to you. By keeping more of the proceeds from your sale intact, you may be better positioned to achieve your personal and charitable goals. One of the most common ways to make pre-sale gifts is through a donor-advised fund (DAF).¹

Before selling your business, consider how a DAF strategy may provide substantial benefits. Let’s assume you’ve decided to sell a $40 million business you built from scratch. There are a couple of ways you might structure a donation from proceeds of the sale. 

— In this scenario, you gift 15% of the proceeds, or $6 million, to charity after you sell your business. This creates potentially significant income tax inefficiencies:

• Your taxable income for the year will include the full value of the business sale ($40 million).
• You’ll owe capital gains taxes on the business sale value, meaning the sale proceeds used to make your charitable gift will have already been taxed. Assuming a capital gains rate of 25%, making that $6 million gift has effectively cost you an extra $1.5 million.
• While you may be entitled to an income tax deduction when you make the gift, waiting until after the sale means you’ll gain the deduction in a year when you may no longer be earning income from the company, thus diminishing the value of the deduction.

— Instead of gifting aſter-sale proceeds, you gift a 15% share of the business in advance of a binding commitment to sell. The charity owns the shares until the transaction goes through, at which point the buyer purchases 85% of the company from you and 15% from the charity. This approach addresses these tax inefficiencies:

• Your taxable income will include only the sale value of the business minus the value of your contribution ($34 million vs $40 million).
• You may be entitled to an immediate income tax deduction in the year you plan to sell your business.²
• With 15% of the company no longer in your possession, the capital gains tax obligation at the time of the sale decreases accordingly.
• A DAF operates similarly to a private foundation but is operated by a public charity instead of the individual donor. A DAF may accept gifts of private business interests, and donors may be entitled to a federal income tax charitable deduction equal to fair market value. The DAF is not subject to capital gains tax when the shares are sold.
• With a DAF, the proceeds of your gifted shares may be invested and grow income tax-free, while retaining the flexibility to support charities and causes you care about, when and how you choose.

You don’t need to be a sole owner selling to a third party to take advantage of this tax-efficient gifting strategy. Similar advantages are available to those who may be keeping the business in the family or selling a portion of a business.

As with any financial transaction, pre-sale gifting entails some trade-offs. Since you’re donating private unsold shares rather than dollars, the deduction you claim will be based on the company’s estimated value. Working with a skilled independent business valuation specialist is essential to allow you to claim your federal income tax charitable contribution deduction and is an IRS requirement.

Donating to the charity or DAF well before a binding commitment to sell is in place is critical, but:

• A donation too close to the sale may prompt the IRS to value the shares at the basis price (their value when you originally started or bought the company) for deduction purposes. This could effectively eliminate the value of the deduction.
• A donation made too early can also pose risks, as the ownership rights of any shares you gift will belong to the charity until you sell the business and you will, therefore, be effectively giving away partial control of your company.³

Of course, most business owners give out of a desire to do good. However, a thoughtful, purposeful, tax-minimizing approach to pairing the sale of your business with strategic pre-sale gifting could ensure that more of the economic value of your company flows to your family and supports your charitable goals. We have extensive experience helping business owners plan and execute successful business sales and pre-sale gifting strategies.

Your advisor can tap a team of Bank of America experts to help guide key decisions on charitable giving, taxes, business succession and more. We work closely with you and your family, your CPA, attorney and other advisors to help ensure that a sale brings the rewards you envision for yourself, for your family and for the causes you care about.