Two business owners were selling their interests in a business and had in place a strategy to minimize tax liability and contributing significant proceeds from the sale to charities. One of the sellers hired Lou Pereira, President of Merrimack Business Appraisers, to ensure he had a business valuation professional who understood the complexities of such a transaction and could advise on the important timing sequence to achieve his goals of a tax deduction for the charitable donation.
At first glance, the business valuation work to value the owner’s interest in the business being sold while donating a percentage of the shares to charity may seem quite straightforward: value the shares, allocate some of the shares that will be donated to the charity. The buyer buys the defined percentage from the seller and buys the defined percentage of shares from the charity. Deal is done and tax strategies and charitable donations for the seller are achieved. The reality is there are important nuances that are critical to understand and execute correctly or the seller’s tax deduction goals will not be achieved.
If the sequencing of the associated transactions are not sufficiently spaced out, the IRS may disallow the charitable donation as part of the sale of the business.
Merrimack Business Appraisers’ Approach
As one of fewer than 12 Certified Business Appraisers in New England, Lou Pereira has the expertise to fully understand the business valuation calculation of the shares for charity as well as knowing the specific IRS requirements related to charitable contributions. The valuation of the business, the associated shares donated to charity, and the timing of the transactions were completed and executed in a manner to ensure the intended goals were achieved.
The result was the seller secured the desired tax deduction, significantly reduced his tax liability, and accomplished his goal of making a substantial donation to a charity of his choice.