Donating Shares of Privately Held Companies: A Guide

Quick answer

• Understand the tax implications: Donating appreciated shares can offer significant tax benefits.
• Consult legal and financial professionals: This process is complex and requires expert guidance.
• Obtain a qualified appraisal: For non-publicly traded stock, an independent appraisal is crucial for tax deductions.
• Consider the company’s structure: The type of entity (C-corp, S-corp, LLC) impacts donation rules.
• Document everything meticulously: Keep detailed records of the donation, appraisal, and transfer.
• Plan the timing: Consider the company’s financial health and your personal tax situation.

Who this is for

• Individuals who own stock in privately held companies and wish to support charitable causes.
• Donors seeking to maximize their tax benefits from charitable giving.
• Philanthropists who want to understand the complexities of donating illiquid assets.

What to check first (before you donate shares of privately held companies)

Goal and timeline

Before initiating any donation, clarify your charitable intent and when you wish the donation to be completed. Are you aiming for a specific tax year deduction, or is the timing less critical? Understanding your timeline will help manage the necessary steps, which can be lengthy for private company shares.

Current cash flow

Assess your current financial situation. While donating shares can be tax-efficient, ensure you have sufficient liquid assets to cover your immediate living expenses and any short-term financial obligations. Donating illiquid assets should not jeopardize your personal financial stability.

Emergency fund or safety buffer

Confirm you have a robust emergency fund. This fund should cover 3-6 months (or more, depending on your circumstances) of essential living expenses. Donating shares means those assets are no longer available to you, so a secure buffer is paramount.

Debt and interest rates

Review any outstanding debts. High-interest debt can significantly erode your financial well-being. While donating shares can be beneficial, it’s often more financially prudent to pay off high-interest debt before making substantial non-essential donations, unless the tax benefits of the donation clearly outweigh the interest costs.

Credit impact

Donating shares does not directly impact your credit score. However, the financial planning involved in such a donation might indirectly influence your creditworthiness if it leads to significant changes in your overall financial health or borrowing needs.

Step-by-step: Donating Shares of Privately Held Companies

1. Define Your Charitable Goal:

• What to do: Clearly identify the charity you wish to support and the specific purpose of your donation (e.g., general support, a specific program).
• What “good” looks like: You have a clear understanding of the impact you want your donation to have and the recipient organization is a qualified 501(c)(3) public charity.
• Common mistake: Choosing a charity without verifying its tax-exempt status or ensuring it aligns with your philanthropic goals.
• Avoid it by: Visiting the IRS Tax Exempt Organization Search tool or asking the charity for its IRS determination letter.

2. Consult Professionals:

• What to do: Engage with a qualified tax advisor (CPA or Enrolled Agent) and potentially a legal professional experienced in charitable giving and securities.
• What “good” looks like: You have a team of experts guiding you through the legal and tax complexities.
• Common mistake: Attempting to navigate the process alone, leading to errors in valuation or compliance.
• Avoid it by: Researching and interviewing professionals who have specific experience with private company stock donations.

3. Determine the Type of Shares and Company Structure:

• What to do: Identify whether you hold common stock, preferred stock, or options, and understand if the company is a C-corporation, S-corporation, LLC, or partnership.
• What “good” looks like: You know the exact type of equity you own and the legal structure of the issuing company, as this affects tax treatment.
• Common mistake: Assuming all stock is treated the same for donation purposes.
• Avoid it by: Reviewing your stock certificates, shareholder agreements, and consulting with your company’s management or legal counsel.

4. Obtain a Qualified Appraisal:

• What to do: If the shares are not publicly traded, you will need a qualified appraisal from an independent, credentialed appraiser. This appraisal determines the fair market value (FMV) of the shares.
• What “good” looks like: You have a detailed appraisal report that meets IRS requirements and accurately reflects the FMV of your shares.
• Common mistake: Using an internal valuation or an informal estimate, which the IRS will likely reject.
• Avoid it by: Hiring an appraiser who is recognized by the IRS as a “qualified appraiser” and who has experience valuing private company stock.

5. Understand Tax Implications and Eligibility:

• What to do: Work with your tax advisor to understand the potential tax deduction based on the FMV, your adjusted gross income (AGI) limitations, and any capital gains tax implications if the shares were held in a taxable account.
• What “good” looks like: You have a clear estimate of your potential tax deduction and understand any limitations.
• Common mistake: Overestimating the deductible amount or failing to account for AGI limitations.
• Avoid it by: Discussing your specific financial situation and the appraisal with your tax advisor.

6. Confirm Charity’s Acceptance Policy:

• What to do: Contact the charitable organization and inform them of your intention to donate private company shares. They may have specific policies or procedures for accepting such gifts.
• What “good” looks like: The charity is willing and able to accept your donation and has a process in place.
• Common mistake: Assuming all charities can easily accept and manage illiquid assets like private stock.
• Avoid it by: Having an open conversation with the charity’s development or finance department early in the process.

7. Transfer the Shares:

• What to do: Work with the company’s transfer agent (if applicable) or the company itself to formally transfer ownership of the shares to the charity. This usually involves signing stock powers or other transfer documents.
• What “good” looks like: The legal transfer of ownership is complete and properly documented.
• Common mistake: Incomplete or improperly executed transfer documents.
• Avoid it by: Following the instructions provided by the company and the charity precisely, and having your advisor review the documentation.

8. Complete IRS Form 8283:

• What to do: If your deduction for noncash contributions is more than $500, you must file IRS Form 8283, Noncash Charitable Contributions. For stock valued above a certain threshold, a qualified appraisal summary must be attached.
• What “good” looks like: Form 8283 is accurately completed and filed with your tax return.
• Common mistake: Failing to file Form 8283 or providing incomplete information.
• Avoid it by: Working with your tax advisor to ensure all required sections are filled out correctly and the appraisal summary is attached if needed.

9. Retain Records:

• What to do: Keep copies of all relevant documents, including the appraisal, transfer documents, charity’s acknowledgment letter, and your tax filings.
• What “good” looks like: You have a comprehensive file of the entire donation process for future reference or in case of an audit.
• Common mistake: Discarding important paperwork after the donation is complete.
• Avoid it by: Creating a dedicated file for charitable giving documentation and storing it securely.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
<strong>Ignoring the need for a qualified appraisal</strong>	Inability to claim a tax deduction for the full fair market value; potential IRS disallowance of the deduction.	Obtain a formal appraisal from an IRS-qualified appraiser before making the donation.
<strong>Not verifying the charity’s tax-exempt status</strong>	Donating to an organization that is not eligible to receive tax-deductible contributions.	Verify the charity’s 501(c)(3) status with the IRS or ask the organization for its determination letter.
<strong>Overestimating the fair market value (FMV)</strong>	Claiming an excessive deduction, leading to an IRS audit and potential penalties or disallowance.	Rely on a professional, independent appraisal to determine the FMV.
<strong>Failing to get charity’s acceptance</strong>	The charity may be unable to accept the shares, or may have specific requirements you didn’t meet.	Communicate with the charity early to ensure they can and will accept the donation and understand their process.
<strong>Improperly transferring ownership</strong>	The donation may not be considered complete, leading to tax complications or disputes over ownership.	Follow the company’s and transfer agent’s procedures precisely for transferring stock ownership.
<strong>Not understanding AGI limitations</strong>	Claiming a deduction that exceeds annual limits, forcing you to carry over the excess deduction for future years.	Work with your tax advisor to understand your Adjusted Gross Income (AGI) limitations for charitable contributions.
<strong>Incomplete or incorrect IRS Form 8283</strong>	The IRS may disallow your deduction if the form is not filed or is filed with errors.	Ensure Form 8283 is accurately completed with all required information, including the appraisal summary if applicable.
<strong>Not retaining proper documentation</strong>	Difficulty substantiating your deduction if audited by the IRS, leading to penalties and back taxes.	Keep meticulous records of the appraisal, transfer documents, charity acknowledgment, and your tax filings for at least three years (or longer as advised).
<strong>Donating illiquid stock without liquidity plan</strong>	The charity may struggle to sell the shares, or you may not receive a timely acknowledgment.	Discuss with the charity how they plan to liquidate the shares and if they have a policy for handling such gifts.
<strong>Ignoring the company’s stock restrictions</strong>	Restrictions on transferability (e.g., lock-up periods, rights of first refusal) can complicate or prevent donation.	Review all shareholder agreements and company policies regarding stock transferability before proceeding.

Decision rules for donating shares of privately held companies

• If your primary goal is to maximize tax deductions, then focus on shares with significant unrealized appreciation held for over a year, because long-term capital gains treatment offers greater tax benefits.
• If the company is a C-corporation and the shares have appreciated, then donating them directly to charity is generally more tax-efficient than selling them and donating the cash, because you avoid paying capital gains tax on the appreciation.
• If the company is an S-corporation and you are a shareholder, then donating S-corp stock can be complex; consult a tax advisor because the pass-through nature of S-corp income and losses affects valuation and tax treatment.
• If the shares are not readily marketable, then obtaining a qualified appraisal is mandatory for tax deduction purposes because the IRS requires an independent valuation of non-publicly traded securities.
• If the charitable organization is not prepared to accept illiquid assets, then you should consider selling the shares first (if possible) and donating the cash, because some charities lack the resources or expertise to manage private company stock.
• If your adjusted gross income (AGI) is low, then be aware of AGI limitations on charitable deductions, because you may only be able to deduct a certain percentage of your AGI each year, with excess carried forward.
• If you received the shares as part of an employee stock option plan, then understand the tax basis and vesting schedule, because these factors significantly influence the potential tax deduction and your eligibility to donate.
• If the company has a buy-sell agreement, then review its terms carefully, because it may contain clauses that restrict the transfer of shares, including to charitable organizations.
• If the company has experienced recent losses or financial distress, then the fair market value of the shares may be low, impacting the potential tax deduction, because the appraisal will reflect the current financial health.
• If the company is a partnership or LLC, then consult a tax professional about how donating your interest will be treated, because partnership/LLC taxation can be complex and may involve unrelated business taxable income (UBTI) for the charity.
• If the shares are subject to significant restrictions on transferability, then the appraisal must account for these restrictions, because they reduce the fair market value.

FAQ

What is considered “privately held stock”?

Privately held stock refers to shares of a company that are not traded on a public stock exchange like the NYSE or Nasdaq. Ownership is typically restricted to founders, employees, early investors, or venture capitalists.

Can I get a tax deduction for donating private company shares?

Yes, you can generally receive a tax deduction for donating appreciated private company shares to a qualified public charity, provided you follow IRS rules, including obtaining a qualified appraisal.

How is the fair market value (FMV) of private company stock determined?

The FMV is determined by a qualified appraisal from an independent expert. This appraisal considers various factors, including the company’s financial performance, assets, liabilities, industry outlook, and comparable public companies.

What is a “qualified appraisal” and who performs it?

A qualified appraisal is a formal valuation report prepared by an individual or entity recognized by the IRS as a “qualified appraiser.” This appraiser must be independent of the donor and the company.

Are there limits on how much I can deduct?

Yes, the IRS limits the amount of charitable deduction you can claim based on your Adjusted Gross Income (AGI). For appreciated property like stock, the limit is typically 30% of your AGI, with excess amounts carried forward.

What if the charity can’t sell the shares easily?

Charities may have varying capacities to handle illiquid assets. It’s crucial to discuss this with the charity beforehand to ensure they have a strategy for valuing and liquidating such gifts, or if they can accept them at all.

Does the type of company (C-corp vs. S-corp) matter?

Yes, the legal structure of the company significantly impacts the tax treatment of the donation. C-corporation stock often offers more straightforward tax benefits compared to S-corporation stock due to differences in how income is taxed.

What documentation do I need to keep?

You need to keep the qualified appraisal report, documentation of the share transfer, the charity’s written acknowledgment of the donation, and a copy of your tax return including IRS Form 8283.

What happens if I don’t get an appraisal?

If your deduction for noncash contributions exceeds $500 and you don’t have a qualified appraisal, the IRS may disallow your deduction, or significantly reduce the amount you can claim.

What this page does NOT cover (and where to go next)

• Specific company valuation methodologies: This guide provides general principles; detailed valuation techniques are complex and require specialized expertise.
• International tax implications: This guide focuses on US tax law. Donations by non-US persons or to non-US charities have different rules.
• Donating to private foundations or donor-advised funds: While related, the rules and benefits for these entities can differ from donating to public charities.
• Estate planning implications: How donating shares might affect your estate and inheritance tax planning is a separate, complex area.
• Employee Stock Options (ESOs) and Restricted Stock Units (RSUs) donation specifics: While mentioned, the detailed tax treatment and transferability of these award types require specialized advice.

Where to go next:

• Consult with a tax advisor specializing in charitable giving.
• Seek legal counsel for complex transfer and corporate governance issues.
• Explore resources on estate planning and wealth transfer.
• Research different types of charitable giving vehicles.