When it comes to philanthropic giving business owners are often at the top of the list. Not only do owners give on a regular basis, but many of my clients have the goal to give a portion of their proceeds of the sale of their business to their favorite charity. Luckily, there are tax benefits to making charitable donations. Giving allows you to experience personal satisfaction as well as knowing the money will go directly to the needy, rather than going through Uncle Sam.
Typically, the donation amount that seems to always get tossed around is about 10%. So if you sold your business for $5 million, you would give $500k of the sale to the charity of your choice. This is definitely a noble and altruistic action. It is also important to note that a lot of people take different approaches to accomplishing this. I’m going to give you a little insight into how you can do just that. All the while, maximizing the money that you end up pocketing. Let’s look at some numbers to give you an idea.
Here’s an example of a sale I happen to be working on. Some clients of mine stand to gross right about $10 million after the sale of their company is complete. The owners want to give $1 million of those proceeds to a charity. In this particular case, it happens to be a religious organization. Originally they planned to gift the money after the sale. So after receiving the $10 million they would pay taxes and gift the million dollar contribution to the charity of their choice.
Instead of the initial $7,270,000 they were going to net, they increased their bank account by $220k by pre-gifting the charitable intent before the sale occurred. — Justin Goodbread, CFP®Click to tweet
I convinced him to run the numbers a little differently. We did an analysis based on that scenario with their CPA. Here’s what we came up with. If they sold the business for $10 million, paid their taxes and donated the money after the fact, they’d walk away with, net cash, about $7,270,000. Which obviously isn’t too shabby of a number. A million dollars goes to charity and the rest taxes. So, they end up losing around $2.8 million out of their $10 million deal.
Well, the alternative route to this is to give the money to charity before the sale ever takes place. It is called a pre-gift to charity. So when we started looking at the numbers, and we decided to proceed with pre-gifting the million dollars to the charity, we came out to the good by over $200k more.
Most of the time a client does not understand the process and all the different factors that come into play here. Giving charitable contributions before the sale ever takes place saves the business owner on the amount of taxes he will have to pay after the sale.
For instance, using the apples-to-apples comparison from the case I’m working on, we give the million dollars to charity before selling the business. So we promised this charity the money beforehand (we could do this many different ways). Then we proceeded with selling the company. After the taxes, the net proceeds to the client were now $7,490,000. So instead of the initial $7,270,000 they were going to net, they increased their bank account by $220k by pre-gifting the charitable intent before the sale occurred.
If you have a philanthropic desire, you can easily meet that longing and still net yourself a larger profit. All it takes is properly planning the gift. So whatever your sale price is, it does not have to be a $10 million, you can still take care of both your favorite charity as well as yourself. In the example above, the reason for the more than a $200k difference is the taxable amount. The IRS only taxed $9 million of the sales price instead of the original ten. Despite the $10 million price tag, one million was promised and donated to charity. Therefore avoiding the extra taxation on that amount. So just by pre-gifting the money, we lowered the taxes, increased our personal bottom line, and still accomplished our philanthropic wish. I’d call that a win/win for sure.