Donating appreciated stock is an excellent tax-efficient method of funding charitable gifts because the taxpayer making the donation avoids paying capital gains tax on the appreciation while still being able to deduct the fair market value of the stock as a charitable contribution.
The taxpayer’s process for valuing, substantiating and reporting the stock donation depends on the type of stock donated as follows:
- Publicly Traded Stock – is stock for which market quotations are readily available on established securities markets (e.g., stock exchanges, over-the-counter markets, or mutual fund listings that have daily published quotations). The donation is valued as the average of the highest and lowest selling prices on the contribution date (not the closing price) except for shares of a mutual fund which are valued at the public redemption price on the contributions date. The donation is reported on Form 8283, Part A of the taxpayer’s income tax return.
- Non-publicly Traded Stock – is stock evidenced by a stock certificate that does not qualify as publicly traded stock. The donation’s value is estimated by considering the corporation’s net worth, prospective earning power, dividend-paying capacity, and other relevant factors including the business’s nature, history and goodwill; the industry’s economic outlook; the company’s position within its industry; and the value of stock of corporations in the same or similar business. A qualified appraisal is required if the donation is valued over $10,000. The donation is reported on Form 8283, Part A of the taxpayer’s income tax return if the donation is $5,000 or less and on Form 8283, Part B is greater than $5,000.
Closely-held or S Corporation stock may not be the best choice for a stock donation because:
- The fair market value of the shares may be difficult or costly to determine;
- If the donation to be deducted exceeds $10,000, the donor must obtain a qualified appraisal;
- If the stock is donated to a private non-operating foundation, the deduction is limited to the lesser of the donor’s basis or the fair market value;
- If the recipient cannot sell the closely-held stock (due to its lack of market), the gift may have limited value unless enough stock is donated to provide the recipient with control or influence over business matters; and
- If the recipient receives S Corporation stock, pass-through income reported on Schedule K-1 will be subject to unrelated business taxable income.
Stock donations can be an excellent financial and tax planning tool, particularly before the end of the calendar year. Contact Flexible Accounting Services of the Triangle today and let us assist you with valuing, substantiating and reporting your donations of stock.