Charitable contributions can be an effective way to lower taxes for the current tax year, but they don’t necessarily have to be made with cash. Charities also welcome donations of company stock, which offer a hidden bonus to donors if the shares have appreciated in value over the years. To reap the tax benefits on private stock donations, however, it’s essential to obtain a business valuation from a “qualified appraiser.”

Tax benefits

Since 2007, corporate stock has been the most popular type of non-cash charitable contribution. Corporate stock donations amounted to $39.6 billion in 2019, or 54.4% of all non-cash contributions for that year, according to the Summer 2022 Statistics of Income Bulletin published by the IRS.

A taxpayer who itemizes can deduct the fair market value (FMV) of a donation of corporate stock made to a qualified charity in the year the donation is made. As an added bonus, donating shares of appreciated stock allows taxpayers to escape the capital gains hit that they’d incur if they sold the shares. Because the charitable organization is tax exempt, it can later sell the donated shares without owing any tax.

Substantiation requirements

Many corporate stock contributions consist of publicly traded shares that are relatively easy to value. But when owners of private businesses contribute stock in their companies, value is often harder to estimate.

To claim the tax deduction for a private stock donation, you must:

• File Form 8283 Section B for a donation valued at more than $5,000,

• Obtain an independent appraisal from a qualified appraiser within 60 days (before or after) the date of the gift if the stock is valued at more than $10,000, and

• Attach the appraisal to your tax return if the shares are valued at more than $500,000.

FMV represents “the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” The stock’s value also must be adjusted to reflect any restrictions on the use of the donated property. In a business valuation context, this adjustment may be made through discounts for lack of control and marketability.

Detailed appraisal

Business valuation reports for donations worth more than $10,000 must be written and include the following details:

• Descriptions of the donation, including dates of the contribution and valuation as well as terms of any agreements relating to the use, sale or other disposition of the property,

• Statements that the reports were prepared for income tax purposes,

• FMV on the date of contribution,

• Methods used to value the business interest, such as the cost, market or income approach, and

• Any specific data the appraiser used to determine FMV, such as comparable sales transactions.

In addition, the report should identify the business valuation firm and list the appraiser’s qualifications, including background, experience, education and memberships in professional appraisal associations. It’s important to use an appraiser who has earned a business valuation designation from a recognized professional organization and who meets IRS requirements for education and experience. The IRS specifically prohibits do-it-yourself valuations by the donor, donee or related parties.

(This is Blog Post #1292)