Philanthropically inclined business owners have many options for charitable giving. One popular avenue in today’s busy mergers and acquisitions environment is the donation of stock to a donor-advised fund (DAF).
A DAF is a tax-efficient way for individuals to give to their favorite charities. When the donor contributes stock to the DAF, he or she can take an immediate tax deduction and avoid capital gains recognition. The donation can then grow tax-free in the DAF.
The IRS requires a valuation for such donations. When filing the tax return for the year in which the deduction is first claimed, the taxpayer must file Form 8283, and the valuation analyst must sign the form, verifying the valuation’s accuracy.
It’s important to time the gift—and the valuation—relative to the sale of the company. To be recognized by the IRS as a legitimate charitable contribution (one made without the sole intent of a tax benefit by diverting income), the donor must contribute the privately held stock before a legally binding letter of intent to sell is in place.
In addition, the valuation must be done no earlier than 60 days prior to the gift. A typical charitable contribution would be at fair market value, but with this type of donation, the transaction price could also be a factor.
This is because valuations reflect a particular point in time and involve only those facts and circumstances that were known or knowable on that date. While the potential sale of the company would be known, the precise transaction price would still be uncertain, which might result in a discount.
To ensure that the contribution meets the business owner’s intent and the IRS’s rules, consult with your tax advisor as you plan your gift.