Why Now & How: Gifts of Private Company Stock

Learn how to donate your privately held stock and support the organizations that matter most to you.

Much has been made about the performance of publicly traded, or publicly owned, companies in 2020 and 2021. Despite a “COVID dip” in March 2020 and other short-term declines, the stock market has continued to climb at a historic pace overall since the 2008 financial crisis. In fact, many private companies are also performing well in this economy and increasing in value alongside public companies. This article explains why this is a good time to consider donating private company stock to charity, and how to make such a gift.

WHAT IS PRIVATE COMPANY STOCK?

When a private company issues its stock, it is not offered for sale to the general public on the stock market. Rather, private company stock is only issued to employees or accredited investors, which are described below.  A privately owned company may be closely held or widely held. The shares of a closely held company are predominately owned by one individual owner or by a small group of controlling stockholders. With a widely held company, thousands or even millions of different investors may own shares in a large company.

Whereas public companies must adhere to Securities and Exchange Commission (SEC) regulations and reporting requirements, private companies are usually not required to make the same disclosures.

Accredited investors are individuals or business entities that are allowed to trade securities that may not be registered with financial authorities such as the SEC. These are investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include high net worth individuals, banks, insurance companies, brokers, venture capital firms, universities, and trusts. Private company stock can be traded among accredited investors, and private companies can raise money by issuing stock to additional private investors.

There tends to be a misconception that all privately owned companies are small businesses. Many of them are relatively small, such as a local or regional chain of grocery or hardware stores. However, private companies can also be large, nationally known companies such as Staples, Perdue Farms, and Petsmart.

A privately held company may decide to “go public,” that is, it may make a stock offering to the general public in order to raise money. The first public stock offering of a company is known as its initial public offering (IPO).

WHY DONATE PRIVATE COMPANY STOCK TO CHARITY NOW?

A private company employee or individual accredited investor can consider donating a portion of their holdings to charity. Most often, this would be in anticipation of a liquidity event, such as an acquisition or merger of the company, or an initial public offering. The event presents an opportunity for stockholders to cash out their shares, which they could not do prior because there was little or no market for trading the shares.

If the stock has increased in value since the employee or investor acquired it, then they will have capital gain. If they have owned the stock for less than a year, this will be considered short-term capital gain and taxed at the same rate as ordinary income at the federal level. If they have owned the stock for longer than one year, this will be considered long-term capital gain and the owner will be subject to long-term capital gain tax.

Federal long-term capital gains tax rates are 0%, 15%, and 20%, depending on the investor’s income (and some taxpayers will pay an additional 3.8% surcharge imposed by the Affordable Care Act). While these rates may be lower than ordinary income tax rates, they can still result in a significant tax bill, especially when a lot of profit is being recognized. State-level taxes may apply as well.

When a donor gives private company stock to charity, they may realize a two-fold tax benefit. First, if their giving plan is properly structured, they will not recognize the capital gains for tax purposes. Second, if they have owned the asset for longer than one year, then they could receive a charitable tax deduction for the fair market value of the donated asset.

HOW TO DONATE PRIVATE COMPANY STOCK TO CHARITY

Talk to your financial advisor and/or CPA.

A financial advisor who has an overview of your portfolio and financial goals should be able to assess what assets you might donate to charity. You should also discuss tax strategy with your accountant. One issue to note is that, to claim an income tax deduction for a gift of private company stock, you may need to obtain a “qualified appraisal” (as defined by the IRS) in order to claim your tax deduction, and your financial advisor or CPA may be able to help you identify a qualified appraiser who can provide that.

Talk to the gift planning team at the charity that you support.

Private company stock is a complex asset but many large charities, including Duke, are equipped to receive direct donations of private company stock. Prior to accepting the gift, the university would conduct an assessment which includes collecting information about the company such as the risks, benefits, time horizon for the liquidity event, and complexity of the gift. We will ask questions such as “when does the donor expect the stock to be sold or to go public?” We may also ask for information about the form of the company, such as “is it a corporation, a limited partnership, or a limited liability company?” Collecting this information is part of due diligence.

If the gift is accepted, then Duke will hold the stock until the liquidity event, which may be for a few years. Most donors who give private company stock anticipate a liquidity event two to three years down the road. When a charity sells private company stock, it usually will not have to pay taxes on the profit because the charity is tax exempt; therefore, the full value of the gift will benefit the donor’s favorite cause.

Private company stock is a complex asset, but with smart planning the philanthropic-minded investor can leverage the asset for significant impact within their favorite charitable organizations.

TAGS: privately held securities gifts of stock

About the author

Tia Barnes J.D.’03

tia.barnes@duke.edu

Tia comes to the Office of Gift Planning from Duke Law School where she served the Duke community in various roles for 14 years, most recently as the assistant dean for academic affairs. As an associate director of Gift Planning, Tia works with Duke alumni and friends to explore tax-wise giving strategies, including those involving estate and retirement planning. Tia earned her law degree from Duke and her undergraduate degree in journalism and mass communications from the University of North Carolina at Chapel Hill. She lives in Durham with her family.