Many businesses today have plans for charitable giving. They are led by men and women who view themselves as stewards, rather than owners, and the assets they manage as belonging to God.
With the right strategy, millions of dollars are being transformed into vital support for ministry work, and the lives of owners, their families, their employees, and their communities are being changed in the process. Here are the key ideas:
- Most business owners are not aware they can give a portion of their business to charity.
- Even though a gift of a business interest reduces the owner’s assets, giving an interest in a business often can have minimal impact on the owners’ lifestyle, cash flow, or long-term capitalization of their business.
- Giving an interest in a business may enable owners to double their current cash giving, while dramatically reducing their income tax liability.
Hundreds of successful business owners throughout the country are discovering the unique ways in which they can use their businesses as engines for generosity. Let me explain it using an example, a real-life couple we’ll call the Keplers.*
Bill and Katrina Kepler own and operate a water damage restoration company. The company produced about $1 million of net profit last year and was recently valued at $10 million. The business has grown by double digits from its inception 12 years ago, and it’s expected that the company’s performance will continue for the foreseeable future.
The Keplers are a generous family who give approximately $100,000 annually to various charities. In addition to supporting their local church, they are actively involved in supporting missions helping their city’s homeless community, and they have a deep passion for combating human rights abuses globally – especially human trafficking. They also give very generously of their time.
Considering their healthy annual income, Bill and Katrina live a relatively modest lifestyle. They live exclusively on the $200,000 salary that Bill receives from the company. Because of the high growth prospects the business has enjoyed from its inception, Bill has always reinvested most of his profits in the business. However, reinvestment has limited the Keplers’ capacity for charitable giving. They would love to give more, but they simply lack the available cash resources with which to do so. Or so they thought.
An engine that accelerates generosity
Then a savvy advisor shared a strategy with the Keplers that allows them to increase their annual giving dramatically, even doubling their current cash giving, by using their most valuable financial asset – their business.
The Keplers’ advisor explained how they could gift a relatively small interest in their business each year to secure the maximum charitable deduction allowed under existing tax rules. When giving both cash and assets to charity, taxpayers can generally deduct up to 50 percent of their income each year for their charitable contributions. Of that total allowable deduction, they may deduct up to 30 percent of their income for the asset gift portion of their giving.
So the Keplers’ advisor encouraged them to make a charitable gift of an interest in their business equal to $300,000, 30 percent of their business’s $1 million income. Based on the value of their business, this represented a gift of a 3 percent interest ($10 million divided by $300,000). The following chart illustrates the gift transaction:
Why use a donor-advised fund?
The gift was intentionally made to a donor-advised fund for two primary reasons:
- Because a donor-advised fund is classified as a public charity under the tax rules, Bill and Katrina receive a full fair-market-value deduction for their gift. Had they made a gift to a private foundation, their deduction would have been limited to their income tax basis in the business – which is quite low in comparison to the value of the business.
- The donor-advised fund provides a mechanism allowing the Keplers to make a single charitable gift that ultimately supports numerous charities, as the donor-advised fund is able to grant to the multiple, end charities that the Keplers seek to support. Once the donor-advised fund receives cash – either from annual distributions of income from the business or proceeds from an eventual sale of the business – Bill and Katrina can then advise grants of cash from their donor-advised fund to any number of charities that they recommend.
However, with the tax savings resulting from their business interest gift, the Keplers now have an additional 13 percent of retained income they could use to make an additional gift to charity.
However, the Keplers had an additional 10 percent of income that could still be offset by charitable contributions. Their advisor suggested they take a portion of the income tax savings that they had just realized from the business-interest gift and make an additional cash gift that would be sufficient to use their remaining 10 percent deduction capacity. So Bill and Katrina made an additional cash gift of $100,000 from the $136,800 of tax savings. The additional cash gift also provided a charitable deduction, saving $45,600 more in taxes and taking their total giving to the maximum deductible amount, 50 percent of income.
The giving strategy described above had no adverse impact on Bill and Katrina’s lifestyle or on the capitalization and cash flow needs of their business. In fact, their cash flow actually increased due to the tax savings they realized. Despite the fact that the Keplers gave $100,000 of the tax savings to charity, at the end of the day they still had $82,400 of additional cash flow from making these gifts – $36,800 after $100,000 of the initial tax savings from the business gift was made in the form of cash, plus $45,600 in tax savings from the subsequent cash gift.
Combining a vacation and mission
Most of the $82,400 of increased cash flow was reinvested in their business. However, they did use a portion of it to fund a two-week combined vacation and mission trip to Africa that had an unexpected, transformational impact on their lives. In addition to experiencing the beautiful sights and sounds of Africa, including an unforgettable safari, they had a unique opportunity to meet their ”adopted“ daughter, 9-year-old Christina, whom they’ve supported for years through a child-sponsorship program with an international charity that combats child poverty. The Keplers’ trip marked the first time in more than 12 years that Bill had taken a full two-week reprieve from the demands of running a successful business.
Bill and Katrina are planning to continue this pattern of giving each year. Another benefit of this strategy is that their wealth, as represented by their business, will actually increase over time. That’s despite giving additional gifts in their business. Because their business is growing at double digits each year, and because they are gifting an interest in their business of only 3 percent each year, the value of their retained ownership continues to increase. At the same time, the Kepler’s charitable giving has increased dramatically, to 50 percent from 10 percent of their income.
The Keplers’ greatest joy comes from witnessing the lives that are touched and transformed by the charities with which they partner. The business-interest giving strategy they’ve implemented has enabled them literally to double their support for their charitable endeavors. That’s because their current cash giving has correspondingly doubled as a result of giving a portion of the tax savings generated from their business-interest gift. The Keplers are also excited about the fact that at some point in the future, when their business is sold or liquidated, very significant additional assets will be available to support the charities they care about. This is a result they had never imagined possible until a creative advisor shared with them how their business could be a powerful engine for greater impact and generosity.
* We’ve changed the names and a few details in the story, so we could share more of the financial details with you.
Photo: Ruchindra Gunasekara, Unsplash
Copyright © 2020 by Michael King. Used with permission.