Why this matters
Closely held businesses—family companies, partnerships, S corporations and privately owned C corporations—have special options and constraints when giving to charity. The choice of vehicle and timing affects tax outcomes, business control, legal compliance (especially for private foundations), and community relations. In my practice advising business owners, a well-structured plan often amplifies charitable impact while protecting company value and avoiding common IRS pitfalls.
Entity-level rules and who claims the deduction
- C corporations: Generally the corporation itself takes the deduction for charitable contributions it makes. Corporate rules, shareholder negotiations, and state law influence whether the business should donate directly or distribute earnings for owners to give personally.
- S corporations and partnerships: Charitable contributions usually pass through to owners and are claimed on their individual returns according to their ownership share. That means the tax benefit lands with the shareholders or partners, not the entity.
- Owners vs. business donations: A business gift (for example, corporate sponsorship or donation of inventory) can generate marketing and employee-relations benefits but follows different tax substantiation and valuation rules than an owner’s personal donation.
Because tax limits, carryforwards and deduction rules differ by entity and asset type, always confirm current rules with IRS guidance (see Resources) and your CPA before executing large gifts.
Practical giving vehicles for closely held businesses
Below are common vehicles and why a closely held business might use them.
1) Direct donations (cash, grants, sponsorships)
- Best for quick support, community visibility and straightforward recordkeeping.
- For C corporations, gifting cash or sponsoring a local nonprofit can support branding and employee engagement but must be documented and valued correctly.
2) Gifts of appreciated property (stock, real estate, business assets)
- Donating appreciated publicly traded securities directly to a public charity or a donor-advised fund (DAF) typically avoids capital gains tax and allows a charitable deduction equal to fair market value, subject to limits.
- Gifting interests in a closely held business is complex. The IRS scrutinizes valuations; special rules may limit deductions when the donor retains control or when transferred interests are subject to restrictions.
- See our guide on Gifting Appreciated Securities: Process and Tax Benefits for steps and documentation tips.
3) Donor-advised funds (DAFs)
- DAFs let donors take an immediate tax deduction when they contribute, then recommend grants over time. They remove the administrative burden of grantmaking while allowing strategic timing of awards.
- DAFs are popular with closely held business owners who want to donate illiquid assets (converted to cash by a sponsoring organization) or who want to involve family members in a multiyear giving plan.
- For more on setup and trade-offs, see our DAF resources: Donor-Advised Funds (DAFs) and When to Use a Donor-Advised Fund vs a Private Foundation.
4) Private foundations
- A private foundation gives maximum control over grantmaking, investments and legacy planning, but it brings added compliance, excise taxes, and self-dealing rules that closely held business owners must watch carefully (IRS intermediate sanctions and self-dealing rules apply).
- Foundations are useful when a family wants to preserve a giving philosophy and involve heirs, but they require governance, annual filings (Form 990-PF), and a clear conflict-of-interest policy.
5) Charitable remainder trusts (CRTs) and charitable gift annuities
- CRTs allow owners to transfer appreciated property into a trust that pays income to specified beneficiaries for a term or life, with the remainder to charity. This can produce income, spread tax consequences, and secure a partial income tax deduction.
- Charitable gift annuities provide fixed payments in return for an irrevocable gift. These vehicles are useful for owners seeking income while supporting a charity.
6) Conservation easements and restricted gifts
- Qualified conservation easements and restricted gifts tied to programmatic outcomes can create large charitable deductions but are heavily scrutinized by the IRS and state agencies for valuation and intent. Use specialists and independent appraisals.
Valuation, substantiation, and audit risk
- Donating publicly traded securities has clear market values; donating closely held interests requires a formal valuation by a qualified appraiser. IRS Publication 561 covers valuations; follow its guidance.
- Keep contemporaneous documentation: gift agreements, board resolutions, appraisals (Form 8283 for noncash contributions over applicable thresholds), and written acknowledgments from recipient charities.
- Large or unusual gifts increase audit risk. Work with a CPA and philanthropic counsel to assemble a defensible file.
Avoiding private foundation pitfalls and self-dealing
Closely held business owners who create private foundations must avoid prohibited transactions such as self-dealing (using foundation assets to benefit a disqualified person), excess business holdings, and taxable expenditures. The IRS enforces excise taxes for violations. If a business plans to contract with or make grants to organizations that benefit the owner’s family or business, get legal advice first and implement conflict-of-interest safeguards.
Timing and tax planning
- Consider timing donations around profitable years, liquidity events, or sales of business assets. A conversion of business assets to charitable gifts may reduce exposure to capital gains taxes but may require advance planning and conversion steps.
- Use year-end giving calendars and coordinate with personal tax planning. Donor-advised funds are useful for capturing a deduction in a high-income year while distributing grants over several years.
Employee engagement and community strategy
Charitable programs can strengthen recruitment, retention and local goodwill. Options include employer matching, payroll-deduction programs, volunteer grants, and workplace giving. Frame programs to align with business values to avoid being perceived as token gestures.
Case examples from practice
- Manufacturing owner: Donated a parcel of underutilized commercial land to a community revitalization charity through a conservation easement structure. The owner received a charitable deduction based on an independent appraisal and preserved the company’s community standing.
- Tech founder: Converted appreciated public stock into a donor-advised fund to claim a deduction in a high-liquidity year, then recommended grants annually to education nonprofits, involving family members in stewardship.
Step-by-step checklist before making large gifts
- Identify whether the entity or the owner will make the gift.
- Confirm the recipient’s tax-exempt status (IRS Exempt Organizations Search).
- Obtain independent appraisal for nonmarketable assets.
- Consult your CPA for deduction limits and carryforward rules.
- Review state charitable solicitation and corporate law consequences.
- Document board/owner approval and maintain written substantiation.
Common mistakes to avoid
- Relying on informal valuations for privately held interests.
- Confusing corporate marketing/sponsorship spend with deductible charitable giving.
- Creating a private foundation without policies to prevent self-dealing.
- Transferring closely held stock without addressing liquidity and control implications.
Professional tips
- Engage a cross-disciplinary team: CPA/tax attorney, valuation expert, philanthropic advisor, and the charity’s development staff.
- Use DAFs when you want simplicity and flexibility; consider a private foundation if you need long-term control and structured succession.
- Plan gifts of business interests well in advance of sales or liquidity events to coordinate tax basis, built-in gains, and valuation timing.
Frequently asked questions
Q: Can a closely held business donate company stock to a charity?
A: Donating publicly traded stock is straightforward; donating privately held stock is possible but requires qualified valuation, and the deduction may be limited when certain conditions apply. Coordinate with advisors.
Q: Who claims the deduction for an S corp’s charitable gift?
A: Charitable contributions typically pass through to shareholders and are reported on their individual returns, in proportion to ownership shares. Entity-level rules and state law may affect this.
Q: Are donor-advised funds appropriate for family businesses?
A: Yes—DAFs can centralize giving and simplify administration while allowing family involvement in grant recommendations. See our DAF overview for details: Donor-Advised Funds (DAFs).
Resources and authoritative guidance
- IRS — Charitable Contributions: https://www.irs.gov/charities-non-profits/charitable-contributions
- IRS Publication 526, Charitable Contributions: https://www.irs.gov/publications/p526
- IRS Publication 561, Determining the Value of Donated Property: https://www.irs.gov/publications/p561
- National Philanthropic Trust — donor-advised funds and statistics: https://www.nptrust.org
- Charity Navigator — evaluating charities: https://www.charitynavigator.org
Final considerations and disclaimer
Closely held businesses can create meaningful social impact and achieve favorable tax outcomes when giving is structured with attention to entity type, valuation, and compliance. In my experience, the best results come from multi-disciplinary planning that treats philanthropy as part of the company’s strategic plan rather than a last-minute tax decision.
This article is educational and does not constitute tax, legal, or investment advice. Always consult a qualified CPA or tax attorney for recommendations tailored to your situation.
