Here is what usually happens. The company sells. The owner pays tax on every dollar of gain. Then, feeling grateful and a little guilty about the size of the check, the owner writes a large check to a good cause. Generous? Yes. Efficient? Not even close. The charity got cash. The IRS got its share of the same dollars first.
Why the sale year is different
Your income spikes once. Deductions are worth the most in your highest-bracket year. For many owners, that’s the sale year and never again.
You can give years of giving at once. A donor-advised fund lets you take the deduction in the sale year and recommend grants to charities over the next five, ten or twenty years. The tax benefit arrives now. The giving happens on your timeline.
You hold something better than cash. Shares with a large built-in gain. Give those, and in the right circumstances neither you nor the charity pays tax on that gain.
The new floor rewards one big year. Starting in 2026, only gifts above 0.5% of your income count. Spread small gifts over many years and a slice of each year’s giving produces nothing. Concentrate them in one large year and the floor barely matters.
Shares before the sale versus cash after
Long-term appreciated stock given to a public charity or a donor-advised fund is generally deductible at fair market value, and the gain on those shares isn’t taxed to you. Sell first and give cash, and you pay tax on the gain, then deduct the gift. Same gift. Very different math.
The catch is timing. Shares given after the deal is effectively done can still leave the gain taxed to the giver. In Estate of Hoensheid, the owner gave shares to a donor-advised fund two days before closing, after telling his attorney he didn’t want to transfer the stock “until we are 99% sure we are closing.” The Tax Court taxed him on the gain, and his deduction failed because the appraisal didn’t meet the rules.
A long-standing IRS ruling on redemptions says the donor is taxed on the proceeds only if the charity was legally bound, or could be forced, to give up the shares. Courts treat that as one factor, not a safe harbor. In Hoensheid the fund wasn’t legally bound to sell, and the owner was taxed anyway, because the sale was already practically certain. A fund that ends up selling in the deal is normal. A gift made after the deal is effectively done is the problem.
Private stock is paperwork-heavy. Gifts of private company stock need a qualified appraisal by a qualified appraiser once they pass $10,000, dated no more than 60 days before the gift and in hand by the time the return is due. Above $500,000, the appraisal gets attached to the return. Hoensheid lost his deduction on exactly these details: his appraisal came from the investment banker on the deal, who had no appraisal credentials. Not every fund or charity will accept private stock, and S corporation stock is harder still. That is why this usually gets lined up early, not in the week before closing.
A fictional example
An owner expects to sell for $10 million and plans to give $1 million. The shares behind that $1 million have a tax basis of $100,000. Figures are illustrative only.
| Shares, given before the deal is set | Cash, given after the sale | |
|---|---|---|
| Gain taxed to the owner on that $1 million | $0 | $900,000 |
| Federal tax on that gain at 23.8% | $0 | About $214,000 |
| New York tax on that gain | None on the gifted shares | Owed on top |
| Charitable deduction | Up to fair market value, within the limits | Up to the cash given, within the limits |
The charity gets $1 million either way. The difference is whether roughly $214,000 of federal tax, plus New York’s share, ever gets paid. Scale it to a $5 million gift and the federal difference passes $1 million.
The vehicles
Donor-advised fund
Simplest and fastest. Contribute shares or cash, deduct in the year you give, recommend grants for years. The fund must agree to accept private stock, and most want to review it weeks ahead.
Charitable remainder trust
Shares go into the trust before the sale; the trust sells without immediate tax and pays you income for life or a term of years. The charity gets what’s left. It can’t hold S corporation stock.
Private foundation
Maximum control and a way to involve the family for generations. Higher costs, tighter deduction limits, and gifts of private stock are generally deductible only at your cost basis, or less.
Gifts from an IRA after 70½
Qualified charitable distributions come straight from an IRA, count toward required withdrawals, and aren’t affected by the new 0.5% floor.
| Donor-advised fund | Charitable remainder trust | Private foundation | |
|---|---|---|---|
| Deduction for appreciated private stock | Fair market value, up to 30% of AGI | Present value of the charity’s remainder only | The lower of your cost basis or its value, up to 20% of AGI |
| Income back to you | None | Yes, for life or a term of years | None |
| Ongoing rules | Few; the sponsor handles them | Annual trust returns and payout rules | A 5% annual payout, a 1.39% excise tax on investment income, self-dealing rules |
| Family control | You recommend grants | You choose the charity that gets the remainder | Full control, for generations |
Charitable remainder trusts, up close
A charitable remainder trust is the vehicle for owners who want to give and still need the money. The shares go into the trust before the deal is set. The trust sells them inside the deal and, as a tax-exempt trust, pays no tax on that sale. The full proceeds stay invested, and the trust pays you a fixed amount or a fixed percentage every year.
- The payout has to be between 5% and 50% a year, and the charity’s projected share has to be at least 10% of what went in.
- You get a deduction in the year of the gift for the present value of what the charity is expected to receive.
- Each payment you receive is taxed under ordering rules that pass the trust’s gain out to you over time.
A trust doesn’t make the gain disappear. It spreads it out over decades, and in the meantime it invests the money that would have gone to the IRS on day one. For an owner with a low basis and a long horizon, that difference compounds. For an owner who needs a lump sum, it’s the wrong tool. Anyone who pitches a remainder trust as a way to avoid capital gains tax entirely is selling you something.
What changed in 2026
The 2025 tax law changed charitable deductions starting this year. Three changes matter for a sale-year gift:
- A floor: only charitable gifts above 0.5% of your AGI count. With $10 million of AGI in the sale year, the first $50,000 of gifts produces no deduction.
- A cap: for people in the top bracket, itemized deductions are worth at most 35 cents per dollar, not 37.
- A permanent 60% limit on cash gifts to public charities. Gifts of appreciated stock to public charities and donor-advised funds are generally limited to 30% of AGI, with five years to carry forward any excess.
The floor rewards giving in big, concentrated years instead of a little every year. That is exactly what a sale year is. IRS Publication 526
The New York wrinkle
New York caps itemized deductions for high earners at a share of their charitable gifts: 50% of the federal charitable deduction when New York income is between $1 million and $10 million, and just 25% above $10 million, where every other itemized deduction disappears. The rule runs through 2029. In a sale year, when New York income can run into eight figures, the state deduction for a $1 million gift can be $250,000. The federal math above still holds. The state math gets run separately, by the CPA, before anyone counts on it. New York itemized deduction instructions
How the sequence usually works
- It starts with what the family wants to give over the next ten years, not just this year.
- Then what the household needs. Giving away money you’ll need isn’t generosity; it’s a planning error. The sale-and-retire calculator shows the math.
- The vehicle is chosen, and it confirms it will accept the shares.
- A qualified appraiser values them.
- The shares move while the deal can still fall apart. Before a letter of intent is the cleanest point; later is where the questions start.
- Then the sale closes, and grants go out from the fund on the family’s schedule.
Every step here takes weeks, not days. Owners who start the week the purchase agreement is signed usually end up writing a check after closing, which is the expensive version of the same generosity.
How Morrowgate handles this. Charitable planning is built into every Morrowgate sale plan. Greg sizes the gift against what the household needs, lines up the vehicle and the appraiser, and coordinates the timing with your CPA and attorney so the shares move while the deal can still fall apart. The family decides what to give. We make sure the order of operations doesn’t give part of it to the IRS.
Questions owners ask
If the sale falls through, can the gift be taken back?
No. A completed gift to a donor-advised fund, a charity or a charitable trust is irrevocable. If the deal dies, the charity still owns the shares. That is the honest risk of giving early, and the reason the gift should be one the family would make either way.
Can S corporation stock go to a donor-advised fund?
Some sponsors accept it, many don’t. A charity holding S corporation stock owes unrelated business income tax on its share of the company’s income and on the gain when the shares are sold, so sponsors that take it usually account for that tax.
When does the gift count for the tax year?
When the shares are actually transferred, not when the gift is promised. For the sale year, that means completed by December 31, with the appraisal and paperwork done right.
Is a donor-advised fund or a private foundation better?
They solve different problems. A donor-advised fund is cheaper, simpler and gives a better deduction for private stock. A foundation gives control and a structure for the family over generations, at a real cost in rules and administration.
Where this guidance stops
This article is general education on charitable giving around a business sale: how the rules and the options generally work. It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- IRS Publication 526: Charitable contributions
- IRS Publication 561: Determining the value of donated property
- IRS: Charitable remainder trusts
- New York State: Instructions for Form IT-196, itemized deductions
- Congressional Research Service: The 2/37ths limitation on itemized deductions
- Congressional Research Service: Tax issues relating to charitable contributions
- Estate of Hoensheid v. Commissioner, T.C. Memo. 2023-34