Press Room: Tax Release

December 02, 2013

Donor Beware: Trap When Giving Qualified Small Business Stock to Charity

Year-end tends to be the time most people focus on catching up on their charitable giving. A tried and true approach for the savvy donor is to be sure to use appreciated stocks rather than cash. Doing so can multiply your tax subsidy for giving. Here is an example:

You have $1,000 of XYZ stock, a publicly traded company. You held it for a long time and your tax basis is negligible. If you sold the stock, you would owe federal taxes of about $240. However if you sold the stock and gave the $1,000 to charity, assuming you could fully deduct the $1,000 gift, you would pay no tax on the sale.

A better deal is to give the XYZ to charity instead. Now you have no capital gain income and you get a $1,000 tax deduction for the gift. That deduction could be worth $400 or more to you. This is why many donors give their appreciated stock, rather than cash. It essentially becomes a double deduction – you avoid paying tax on your gain and you get to shelter an equivalent amount of income with your donation deduction.

Here is the possible trap - many investors in successful startups have so-called Qualified Small Business Stock (QSBS). For instance, early investors in LinkedIn could have this special stock. When you sell this stock, you get to pay a reduced rate (potentially zero, in a few more years) of tax on the sale. As an example, assume you have a share of stock in Whizco (which was a Qualified Small Business when you invested) that you bought for $1 back in 2007. Whizco is public and trades at $101. If you sell it, you pay about $18 in federal tax, instead of the $24 that everyone else would pay in 2013. 

The trap is giving the Whizco stock to charity instead of some other appreciated stocks you own. It is better to give away non-QSBS stock and avoid the higher tax you would otherwise owe on those shares. Of course, if all you have is QSBS stock, then it is still better currency to use than cash.

A parting tip - give away that appreciated stock (even if you want to keep it) and keep it too.

Let’s say you have a commitment to give $10,000 to your favorite charity. You can give cash, but you also have some appreciated XYZ stock you could donate instead. The problem is that you really want to hold on to the XYZ stock for the long run and giving it away would defeat that.

Here’s what you do - give away $10,000 of XYZ, then take the $10,000 of cash you would have given to charity and instead buy XYZ on the open market. The result is that you get a tax deduction for the gift and your new tax basis in your XYZ is now $10,000 instead of the lower number. 

Make a difference – and have IRS help!