Business owners often overlook charitable planning and donor-advised funds (DAFs) when they decide to sell their business. However, a DAF is an excellent source of tax savings when selling a business – and it allows the owner to build something of significance beyond their entrepreneurship.

If you’re a financial advisor with a client who is considering selling their business, ask them some questions:

  • Are you ready to close the chapter on this business or retire?
  • Are you worried about the taxes you will incur as a result of selling?
  • Would you prefer that money go to worthy causes?
  • Is it important for you to leave behind a legacy of charitable giving?

If they answer “yes” to these, it may be time to talk about exit planning and setting up a DAF. Planning for philanthropy early in the process allows the business owner to think through every step and get the most out of their donations.

How Does Setting Up a DAF Reduce Taxes When Selling a Business?

Making a charitable contribution to a DAF reduces the tax burden that accompanies a high-income financial windfall, including selling a business. By making a large contribution to a DAF, there is an immediate tax deduction that reduces overall tax liability. The gifted assets typically avoid capital gains and estate taxes.

Timing is crucial in this process, depending on how the business owner wants to manage the gift and due to the various legal aspects of these deals and deductions.* If they set up the DAF early and gift a portion of interest to the fund, they can reap the tax benefit. No income tax will be due on the proceeds of the sale for the part of the business gifted to the DAF. This can offset the taxes that are due for the part of the business not gifted to the DAF, while shielding the owner from capital gains taxes.

However, the owner can also establish a DAF after the sale. While the benefits may be less, they are still substantial. They can donate proceeds from the sale (or other assets) that will still provide a tax deduction to offset the taxes from the deal itself – as long as the DAF contribution occurs within the same tax year as the deal closing.

It is also worth noting that the DAF can be funded with interests in the business itself, cash from the sale, or other non-cash assets.

Additional Benefits of Opening a DAF During a Business Sale

Along with the tax advantages, there are other benefits of funding a DAF when selling a business, such as:

  • Confidentiality – While the DAF sponsor may be publicly known, the DAF itself can grant to charities without disclosing the name of the donor.
  • Years of Charitable Giving – A large contribution means that the DAF can grant out to charities over a long period of time (even though the tax benefits are immediate).
  • Time for Charitable Planning – Funding a DAF means the donor doesn’t have to pick charities to donate to right away; they can work with a financial advisor, the DAF sponsor, and their family to recommend charities over time.
  • A Legacy of Philanthropy – Establishing a DAF means solidifying a philanthropic legacy, which can involve family members and trusted advisors.

If you or your client are selling a business and would like to discuss opening a DAF, contact American Endowment Foundation today.

*Note: The information provided herein is for informational purposes only and should not be interpreted to constitute legal and/or tax advice. Donors should consult their legal and tax advisors regarding their specific situations.