Donating Appreciated Stock to a Private Foundation: Tax Rules
Understand the specific tax framework for gifts of appreciated stock to private foundations, a strategy governed by rules distinct from public charities.
Donating appreciated stock to a private foundation is a philanthropic strategy that intertwines financial planning with charitable goals. This approach allows individuals to support causes they care about while navigating a specific framework of tax regulations. These rules differ notably from those governing donations to public charities, presenting unique considerations for the donor.
Determining the Charitable Deduction
The value of a charitable deduction for a gift to a private foundation is generally limited to the donor’s cost basis in the asset. This means the deduction is based on the original purchase price of the stock, not its current, higher market value. This rule significantly restricts the tax benefit, as it does not account for any appreciation in the stock’s value over the holding period.
An exception to this cost-basis limitation exists for donations of “qualified appreciated stock.” This category includes publicly traded stock for which market quotations are readily available. For a donation to qualify, the stock must also be a long-term capital gain property, meaning the donor must have held it for more than one year. If these conditions are met, the donor can deduct the full fair market value (FMV) of the stock at the time of the contribution.
The advantage of donating qualified appreciated stock is substantial. By contributing the stock directly, the donor avoids paying capital gains tax on the appreciation, which would have been due if they had sold the stock and then donated the cash proceeds. For example, consider a donor with stock purchased for $50,000 (cost basis) that is now worth $250,000 (FMV). A donation of this qualified stock to a private foundation allows for a $250,000 deduction, and the $200,000 capital gain is never taxed to the donor.
This special rule for qualified appreciated stock makes it a highly effective asset for charitable giving to a private foundation. It allows the donor to make a larger gift at a lower after-tax cost.
Annual Deduction Limitations
The use of a charitable deduction is subject to annual limits based on the donor’s adjusted gross income (AGI). For contributions of capital gain property, such as qualified appreciated stock, to a private non-operating foundation, the deduction is limited to 20% of the donor’s AGI for the tax year.
Donations of the same type of property to a public charity are generally subject to a higher limit of 30% of the donor’s AGI. The lower threshold for private foundations means that donors with very large contributions relative to their income may not be able to deduct the full value of their gift in a single year.
If a donor’s contribution of qualified appreciated stock exceeds the 20% AGI limit in the year of the gift, the excess deduction is not lost. The unused portion can be carried forward and deducted over the next five years, subject to the same 20% AGI limit in each of those subsequent years.
Required Documentation and Substantiation
The primary document required by the IRS is Form 8283, Noncash Charitable Contributions. This form must be filed with the donor’s federal income tax return for the year the contribution is made. On this form, the donor must provide a detailed description of the stock, the date it was acquired, the cost basis, and its fair market value on the date of the donation.
For noncash contributions valued at more than $5,000, substantiation requirements become more stringent. While noncash contributions over $5,000 often require a qualified appraisal, an exception exists for publicly traded securities. Donations of qualified appreciated stock do not require a formal appraisal, even when valued over $5,000.
In addition to Form 8283, the donor must secure a contemporaneous written acknowledgment from the private foundation for any contribution of $250 or more. To be considered “contemporaneous,” the donor must receive this acknowledgment by the earlier of the date they file their tax return or the due date of the return. The document must include:
- The name of the foundation
- The date and location of the contribution
- A reasonably detailed description of the stock
- A statement confirming that no goods or services were provided in exchange for the donation
Tax Implications for the Private Foundation
When a private foundation receives a donation of appreciated stock, the foundation takes on the donor’s original cost basis in the stock, a concept known as “carry-over basis.” The primary tax event for the foundation occurs when it decides to sell the donated securities. Upon sale, the foundation must pay a modest excise tax on its net investment income.
This excise tax is currently set at a rate of 1.39% and is applied to the net capital gains realized from the sale of the stock. The capital gain is calculated as the difference between the sale price and the donor’s original cost basis. The rate is significantly lower than the capital gains tax rates that would apply to an individual taxpayer.
The foundation must also follow rules regarding “excess business holdings.” These regulations prevent a private foundation and its disqualified persons—such as major donors and foundation managers—from collectively owning a significant stake in a business enterprise. Generally, their combined ownership is limited to 20% of the voting stock of an incorporated business. If a stock donation results in the foundation exceeding this threshold, it is required to divest itself of the excess holdings, typically within a five-year period, to avoid substantial penalty taxes.