Business owners who want to sell their firms for retirement or other reasons can receive tax advantages by donating a portion of their business to charity, according to Vanguard Charitable.
In effect, the business owners can make Vanguard Charitable, or any donor-advised fund, the beneficiary of their business success by making the fund a part-owner, said Jodi Rosen, Vanguard Charitable’s chief development officer.
“We work with financial advisors every day who are assisting clients with selling a business—it can be any kind of business—and contributing part of the profit to charity. This is done in the same manner as donating other illiquid assets to charity,” Rosen said in an interview.
For instance, an entrepreneur may have founded a business decades ago and is now ready to retire or has another private firm that is offering an attractive price for his business. The owner can donate part of the business to a donor-advised fund, which then becomes part owner.
The donor receives a three-pronged tax benefit through the donation, she said.
Donors receive an immediate tax credit for any money or other assets contributed to a donor-advised fund, including the donation of part of a privately owned business. The donated assets are then held by the donor advised fund tax-free prior to being distributed.
In addition, assets contributed to a donor advised fund are assessed based on the original value, which in some cases could be zero, but no capital gains taxes are due if it is a charitable donation rather than a sale for profit.
“This goes beyond other types of illiquid assets that can be donated, such as art or other valuable collections,” Rosen said. “But the donor gets the same benefits that are obtained when any assets are donated to a donor-advised fund: The assets grow until the philanthropist wants to make a charitable contribution.”
Such tax advantages are part of what is driving the rapid growth in donor advised funds, she added. Vanguard Charitable reported that donations to charity jumped by 45% for fiscal year 2024, which ended June 30, totaling $3 billion granted to charity for the year.
The total giving was made up of more than 222,000 grants to nearly 60,000 nonprofits representing human services, religion, education, health, environment and wildlife, and arts and culture. Since Vanguard Charitable’s inception more than 25 years ago, donors have granted more than $19 billion to nonprofits, Vanguard Charitable said.