With U.S. equity valuations near historically high levels, now might be an opportune time to take advantage of the tax benefits of donating long-term appreciated stock to a qualified charity. Directly donating a winning stock you’ve held for at least one year provides greater tax benefits than writing a check to your favorite cause.
Higher deduction. Your charitable gift deduction will be equal to the market value of the stock on the date of your donation, rather than what you originally paid for it.
No capital gains tax. You avoid paying capital gains tax on the unrealized gains of the stock, because it is transferred directly to the charity rather than sold. That also means the charity gets a bigger gift.
Example: Greg Givesalot bought 50 I.M.Great shares two years ago at $100.00 a share. Its shares have appreciated since then to $150.00 a share, giving him a long-term capital gain of $2,500 if he were to sell today. Instead, Greg avoids the capital gains tax by donating the shares to the Red Cross and he deducts the full market value of $7,500 as an itemized deduction on his tax return.
Some tips to keep in mind:
- To maximize your charitable donations, donate only long-term appreciated stock (stock you’ve held for one year or longer). That way, you can deduct the full market value of the stock, rather than its cost basis (what you originally paid for it).
- If it’s a losing stock, it’s usually better to sell it instead of donating directly. That’s because selling a losing stock will allow you to take a capital loss deduction on your return. Certain limits apply.
FIVE REASONS TO INCORPORATE YOUR BUSINESS
Most new businesses start with no thought about legal structure. In the eyes of the IRS, the default structure is a “sole proprietor,” in which your business profits are taxed on your personal tax return. This can serve you well to start, but there are several reasons you may want to consider incorporating as your business grows.
- To protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.
- To provide a personal liability firewall. The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
- To issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation.
- To gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages.
- To enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise, and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors, and other businesses often prefer to do business with incorporated companies.
If you are still going over the pros and cons of incorporating your business, give our office a call.