Business Valuations Needed for Private Stock Donations

Charitable contributions can be an effective way to lower taxes for the current tax year, but they don't necessarily have to be made with cash. Charities also welcome donations of company stock, which offer a hidden bonus to donors if the shares have appreciated in value over the years. To reap the tax benefits on private stock donations, however, it's essential to obtain a business valuation from a "qualified appraiser."  

private stock gift

Tax Benefits

Since 2007, corporate stock has been the most popular type of noncash charitable contribution. Corporate stock donations amounted to $39.6 billion in 2019, or 54.4% of all noncash contributions for that year, according to the Summer 2022 Statistics of Income Bulletin published by the IRS.

A taxpayer who itemizes can deduct the fair market value (FMV) of a donation of corporate stock made to a qualified charity in the year the donation is made. As an added bonus, donating shares of appreciated stock allows taxpayers to escape the capital gains hit that they'd incur if they sold the shares. Because the charitable organization is tax exempt, it can later sell the donated shares without owing any tax.

Substantiation Requirements

Many corporate stock contributions consist of publicly traded shares that are relatively easy to value. But when owners of private businesses contribute stock in their companies, value is often harder to estimate.

To claim the tax deduction for a private stock donation, you must:

FMV represents "the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts." The stock's value also must be adjusted to reflect any restrictions on the use of the donated property. In a business valuation context, this adjustment may be made through discounts for lack of control and marketability.

Detailed Appraisal

Business valuation reports for donations worth more than $10,000 must be written and include the following details:

In addition, the report should identify the business valuation firm and list the appraiser's qualifications, including background, experience, education and memberships in professional appraisal associations. It's important to use an appraiser who has earned a business valuation designation from a recognized professional organization and who meets IRS requirements for education and experience. The IRS specifically prohibits do-it-yourself valuations by the donor, donee or related parties.

Proceed with Caution

Taxpayers who are contemplating a private stock donation to lower their 2022 tax liability should be aware that the IRS plans to hire additional enforcement agents with funding provided by the Inflation Reduction Act. To help reduce your risk of IRS inquiry, contact us about providing a comprehensive business valuation. Our team of qualified appraisers understands what's required to substantiate a private stock donation with confidence.

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