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Tax Shelter For Corporate Owners

Last update on: Oct 17 2017
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There’s a special tax shelter available only to owners of corporations. The shelter allows you to make a substantial contribution to charity using your corporation’s money, take the deduction on your own tax return, and avoid capital gains taxes on your stock profits.

To make this deal work, you have to plan carefully and execute the plan over a year or longer.

First, you contribute some of your corporate stock to charity. That allows you to deduct on your personal tax return the fair market value of the stock on the date of the contribution. If you contribute the stock to a public charity your deduction can be as high as 50% of your adjusted gross income. Any deduction above the 50% limit can be used on future years’ tax returns until it is used. The charitable contribution is reduced for high income taxpayers, so you might not get the full benefit deduction.

Second, after a period of time your corporation redeems the stock from the charity. That gives the charity cash to use toward its charitable purposes. And your ownership percentage of the corporation is restored.

This is a very attractive deal to taxpayers. That means the IRS doesn’t like it. So you have to be sure to work with a good tax attorney or accountant and have everything done properly. You cannot have a deal with the charity regarding how it will exercise its voting powers while it owns the stock. And you cannot predetermine or guarantee that there will be a redemption of the stock after the contribution is made. You also should be sure a reasonable period of time passes between the contribution and the redemption. At least a year should pass, and probably more to keep the IRS happy.

The rule is that you cannot have the entire sequence of transactions pre-planned in order to get the tax benefits. For example, you have to take the risk that the value of the stock will rise significantly after the contribution, and your corporation will have to redeem the stock at the higher price.

This strategy certainly is not for every business owner. But if your corporation has some free cash flow and you want to help a charity, the “charitable stock bailout” is a technique worth considering.

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