As we approach year end (can you believe it is only six weeks away?), we are in the season where business owners in particular are beginning to focus upon their year end books. Often the work is feverish and goes down to the wire.
Business owners need to know how much profit they’ll make, which translates into how much tax they will owe. At the same time, they are trying to figure out how much more giving they will do. The year end giving produces year end deductions, which also serve to lower their ultimate tax bill.
What many business owners fail to realize is that one of the greatest opportunities for giving is for them to give away part of their business. The law allows each individual to deduct up to 50% of their income each year. Of the 50%, the law provides that 30% may be in the form of a capital asset.
The biggest capital asset for the business owner is the business ownership interest. And here’s the great thing: it often takes just a few percentage points of ownership to reach the 30% of income formula.
Here’s the formula:
1. Write down your income: ___________________
2. Multiply your income by 30%: ________________________
(this equals the amount of available deduction using a non cash asset)
3. List the value of your business: _____________________________
4. Determine what percentage of ownership you must give in order to reach 30% of income deduction: ______________% (No. 2 divided by no. 3)
Assume Joe made $1 million inside of his S corp. Accordingly, Joe could donate up to $300,000 using S Corp stock. Assume Joe’s business is worth $10 million. If Joe donates 3% of his $10 million dollar business to a donor advised fund, then he could deduct up to $300,000 on his income tax return.
The resulting tax savings would allow Joe to give more, and the distributions from the stock would allow for more giving as well.
The methodology is straightforward, but nonetheless you should contact your local Christian community foundation – www.servantchristian.com for the exact way to proceed. Come back to read Friday’s blog for part 2 of this strategy.
William High is the President/General Counsel of the Servant Christian Community Foundation. Servant’s mission is to inspire, teach and facilitate revolutionary biblical generosity. He may be reached at firstname.lastname@example.org.