Charitable Gifts of Business Interests: Process and Pitfalls

Overview

Donating a business interest means transferring ownership—or a portion of it—in a company (S or C corporation stock, partnership or LLC membership interests, or similar securities) to a qualified charitable organization. These gifts can amplify philanthropic impact and, when structured correctly, may also produce significant federal income tax benefits. However, they come with special valuation, eligibility, and documentation rules that make planning essential.

In my 15+ years advising business owners, I’ve seen excellent outcomes when donors plan early and coordinate appraisal, tax, and legal advice. I’ve also seen avoidable mistakes—such as gifting an interest a charity cannot hold or misvaluing an asset—that result in lost deductions or post-gift compliance headaches.

(IRS guidance on charitable giving and deductible limits: IRS Publication 526; valuation rules: IRS Publication 561; noncash contribution reporting: IRS Form 8283 instructions.)

Why donors consider gifting business interests

• Maximize charitable dollars: Donating long‑held appreciated equity to a public charity generally allows a deduction for the asset’s fair market value, while avoiding capital gains tax the donor would owe on a sale. (See IRS Pub. 526.)
• Estate and succession planning: Gifts during life can reduce the donor’s taxable estate and may help transition ownership without a sale.
• Flexible vehicles: Gifts can be made outright to a charity, or routed through split‑interest vehicles such as charitable remainder trusts (CRTs) or donor‑advised funds (DAFs) to balance income needs and legacy goals. For details on DAFs and CRTs, see Donor-Advised Funds: How They Work and Charitable Remainder Trusts vs Donor-Advised Funds: Choosing the Right Vehicle.

How the tax treatment usually works

• Type of property: If the donated interest is long‑term capital gain property (held more than one year), donors typically may deduct the fair market value up to 30% of their adjusted gross income (AGI) for gifts to public charities; lower limits apply for private foundations. If the interest represents ordinary income property or inventory, deduction is usually limited to basis. (IRS Pub. 526)
• Documentation: Noncash gifts with a claimed value greater than $5,000 require Form 8283; if the claimed value exceeds $50,000, a qualified appraisal generally must be obtained and attached to your return, and the appraiser must sign Form 8283, Section B. (See Form 8283 instructions and IRS Pub. 561.)
• Entity complications: Gifts of partnership or LLC interests can create K‑1 reporting issues for the charity and expose it to partnership liabilities—many charities avoid accepting interests that carry obligations. Gifts of S‑corporation stock raise special shareholder‑eligibility and operational concerns.
• Limits and carryovers: If the deduction exceeds AGI limits, donors can carry forward the unused portion up to five years in most cases.

Step‑by‑step process (practical checklist)

1. Confirm charity will accept the asset. Not all charities will accept business interests; many will accept cash, marketable securities, or publicly traded stock, but will decline privately held equity due to administrative or liability concerns. Always get written acceptance.
2. Get a qualified appraisal. For privately held interests, hire a credentialed business appraiser (ASA, CFA, or accredited appraiser experienced with closely held business valuations). This protects the deduction and helps you meet IRS Form 8283 and notice requirements. (IRS Pub. 561)
3. Review entity documents and partnership agreements. Some operating agreements or stock restrictions require consent, impose buy‑sell rules, or limit transfers to charities. Failing to follow these rules can void the transfer or trigger a forced sale.
4. Structure the gift. Decide whether to make an outright gift, fund a DAF, or use a split‑interest vehicle (CRTs, charitable lead trusts). Your goals—income needs, estate planning, and control—will determine the best vehicle.
5. File the right forms. Attach Form 8283 when required. If you receive goods or services from the charity in return, the deductible amount must be reduced by the value of those benefits. Keep contemporaneous records.
6. Coordinate tax reporting. If the charity later sells the interest, its tax treatment depends on the charity’s tax status and whether the activity generates unrelated business taxable income (UBTI).

Common pitfalls and how to avoid them

• Charity refusal: Before valuation and appraisal fees, confirm the charity will accept the class of asset. Many charities refuse partnership or closely held stock because of administrative burdens or liability exposure.
• Incorrect valuation: Donors sometimes rely on internal estimates rather than a qualified appraisal. That risks an IRS challenge or disallowed deduction. For noncash gifts over $50,000, the IRS requires a qualified appraisal. (IRS Pub. 561)
• Overlooking transfer restrictions: Operating agreements, shareholder agreements, or buy‑sell provisions often control transfers. Ignoring them can cause the gift to be invalid or trigger a buyout at unfavorable terms.
• Retained benefits or control: If a donor retains material control, the gift may not be treated as a completed gift for tax purposes. Similarly, if a donor receives significant income or other benefits from the charity in exchange for the gift, the deduction may be limited.
• Deduction limit surprises: Gifts of appreciated property to public charities are limited to 30% of AGI (generally), not 60% like cash gifts. Donors should model AGI limits and carryover rules before committing.

Real‑world examples (illustrative)

• Example 1 — Partnership interest to a public charity: A donor owns a 10% interest in a family partnership with a long‑held capital gain. The charity accepts the interest, a qualified appraisal values it at $500,000, and the donor has basis of $120,000. If the interest qualifies as long‑term capital gain property, the donor may deduct $500,000 (within AGI limits) and avoid paying capital gain tax on the appreciated value—assuming proper documentation and charity acceptance.
• Example 2 — S‑corporation complications: A donor considers gifting S‑corp shares to a university. The company’s shareholder restrictions and the university’s acceptance policy conflict. After legal review, the donor instead funds a DAF with comparable proceeds or funds a CRT to generate income and a remainder to charity.

Special considerations for charities and UBTI

A charity that receives a business interest must evaluate whether the asset will generate unrelated business taxable income (UBTI). If the retained business activity produces UBTI, the charity may owe tax on that income. This concern is a common reason charities decline closely held business interests.

Professional tips

• Start early. Many issues (agreement consents, appraisals, and charity acceptance) take weeks to resolve.
• Use a qualified appraiser with experience in closely held business valuations. Save the engagement letter and report.
• Coordinate tax, legal, and charitable counsel together. One advisor missing the loop can create costly surprises.
• Consider interim vehicles. If a charity won’t accept the interest directly, consider funding a DAF or CRT with the asset (or its sale proceeds) to capture benefits while avoiding direct control issues. See Donor-Advised Funds: How They Work for practical options.

Frequently asked questions

• Who can accept a business interest? Only charities willing to assume the administrative and potential liability burden will accept certain interests. Confirm acceptance in writing.
• Do I automatically get a deduction for fair market value? Only if the property is long‑term capital gain property and you meet all IRS requirements. Otherwise, the deduction may be limited to your basis.
• What forms are required? Generally Form 8283 for noncash gifts over $5,000, and a qualified appraisal for values over $50,000. See Form 8283 instructions and IRS Pub. 561 for details.

Sources and further reading

• IRS — Charitable Giving (general): https://www.irs.gov/charities-non-profits/charitable-giving (IRS guidance on deductibility and rules)
• IRS Publication 526, Charitable Contributions: https://www.irs.gov/pub/irs-pdf/p526.pdf
• IRS Publication 561, Determining the Value of Donated Property: https://www.irs.gov/pub/irs-pdf/p561.pdf
• Form 8283, Noncash Charitable Contributions: https://www.irs.gov/forms-pubs/about-form-8283

Internal resources on FinHelp.io:

• Donor-Advised Funds: How They Work — https://finhelp.io/glossary/donor-advised-funds-how-they-work/
• Charitable Remainder Trusts vs Donor-Advised Funds: Choosing the Right Vehicle — https://finhelp.io/glossary/charitable-remainder-trusts-vs-donor-advised-funds-choosing-the-right-vehicle/

Professional disclaimer

This article is educational and does not constitute tax, legal, or investment advice. The tax rules for charitable gifts of business interests are complex and fact‑specific. Consult a qualified tax advisor, attorney, and the receiving charity before making or documenting any gift.