Gifts of Securities
Disclaimer: This information is not to be used as official tax advice. Please contact your personal tax professional before making decisions.
Donating Securities
Securities or stocks can be separated into three categories: closely held Stock, S corporation stock, and qualified appreciated stock.
Closely Held Stock
The fair market value (FMV) of closely-held stock can be difficult to determine.
Therefore, if the deduction exceeds $10,000, the donor must obtain a qualified appraisal.
Even if the donation is less than $10,000, an independent appraisal may be useful
to help support the claimed value. If the recipient cannot sell the stock, the gift
may have limited value. Also, the donor may not be able to give much stock without
giving the recipient control or influence over voting matters.
S Corporation Stock
S corporation stock is not publicly traded, so a qualified appraisal is required
for donations more than $10,000. Like closely held stock, it may have limited value
because of the inability to sell the shares and the recipient may have control or
influence over voting matters. In addition, the pass-through income from ownership
in S corporation stock is treated as unrelated business income tax (UBIT) to the Foundation.
The donation may be unattractive to the Foundation because the income can trigger
income tax.
Qualified Appreciated Stock
Normally, the charitable deduction for appreciated stock donations is the full fair
market value (FMV) of the stock. Qualified appreciated stock is stock for which market
quotations are readily available on an established securities market and which would
generate long-term capital gain if sold. Mutual fund shares that are not subject to
any resale restrictions are considered qualified appreciated stock.
Benefits
Donations of stock can offer tax benefits to donors, depending on the time frame in which the stocks were held and their individual tax situation.
Short-Term Capital Assets
Donations of short-term capital assets (assets held less than 12 months) do not
offer tax benefits to the donor but are still a valuable and appreciated donation.
If the stock has appreciated, meaning the purchase price (basis) is less than the
current fair market value (FMV), the donor deducts the basis as a charitable contribution.
If the stock has depreciated, meaning the basis is greater than the current FMV, the
donor deducts the FMV as a charitable contribution. In essence, the donor deducts
the lessor of basis or FMV. In addition to the charitable deduction, the donor does
not have to recognize any gains (triggering a taxable event) on the transfer of the
stock.
For example, John bought 100 shares of XYZ Corporation in March for $1,000.00 ($10
per share). Three months later, John donated the shares to the UVU Foundation. At
the time of the donation, the shares were worth $9 per share. The UVU Foundation receives
a benefit of $900, but John can only claim a charitable donation of $900. If the shares
increased in price to $11 per share, the UVU Foundation would receive a benefit of
$1,100, but John can only claim a charitable donation of $1,000. If John had sold
the stock and donated the cash, he would need to recognize the $100 loss or gain and
report it on his tax return.
Long-Term Capital Assets
Only donations of long-term appreciated stock offer donors a significant tax benefit.
In addition to the charitable deduction, donors avoid the potential of a taxable event
if the sale of the stock is followed by the donation of cash.
If the stock has appreciated, meaning the basis is less than the current FMV, the
donor deducts the FMV as a charitable contribution. If the stock has depreciated,
meaning the Basis is greater than the current FMV, the donor deducts the FMV as a
charitable contribution. Basically, with long-term capital assets, the donor gets
to deduct the FMV of the stock. In addition to the charitable deduction, the donor
does not have to recognize any gains (triggering a taxable event) on the transfer
of the stock.
For example, John bought 100 shares of XYZ Corporation in March for $1,000.00 ($10
per share). Three years later, John donated the shares to the UVU Foundation. At the
time of the donation, the shares were worth $9 per share. UVU Foundation receives
a benefit of $900, but John only can claim a charitable donation of $900. If the shares
increased in price to $11 per share, UVU Foundation would receive a benefit of $1,100,
and John can claim a charitable donation of $1,100. If John had sold the stock and
donated the cash, he would need to recognize the $100 loss or gain and report it on
his tax return.
