Many people who have equity compensation are both concentrated in their company stock and charitably minded. What if you could manage both by donating stock?
Equity compensation can make an excellent gift to charity because of the potential charitable impact and tax benefits available to the donor. If you donate these stock awards directly to charity (rather than selling them first and then donating cash proceeds) you may be able to eliminate capital gains tax you would have paid, resulting in up to 20% more to charity. In addition, you may claim a fair market value deduction for your gift.
Donor-advised funds, which are 501(c)(3) public charities, are an excellent gifting option for donations of company stock awards, as the funds typically alleviate the tax burden on what is often highly appreciated stock.
Please be aware that gifts of appreciated non-cash assets can involve complicated tax analysis and advanced planning. This article is only intended to be a general overview of some donation considerations and is not intended to provide tax or legal guidance. In addition, all gifts to donor-advised funds are irrevocable. Please consult with your tax or legal advisor.
Equity compensation awards generally aren't transferable until vested or exercised
The most common forms of equity compensation awards are typically restricted stock units (RSUs), restricted stock awards (RSAs), non-qualified stock options (NSOs), and incentive stock options (ISOs). The awards themselves are generally not transferable and therefore cannot be given to charity. However, once these awards are vested and/or exercised—and the underlying stock is held for more than one year—they can make excellent tax-smart charitable gift options.
What types of equity compensation can be donated to charity?
Not all equity compensation awards are treated the same when it comes to the charitable income tax deduction. As illustrated below, ideal gift options should meet IRS holding period requirements of at least more than one year and have high appreciation above your cost basis. Such gifts enable you to potentially eliminate capital gain tax on the difference between fair market value on the date donated and fair market value when vested or exercised, while also claiming a charitable income tax deduction.
| Equity compensation awards | Tax treatment upon vesting or exercise | Your charitable gift option | Potential tax benefits | Gift rating |
|---|---|---|---|---|
| Vested Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) held greater than 1 year from vesting§§ | Ordinary income tax on difference between fair market value (FMV) at vesting and amount paid for your stock | Eliminate capital gain recognition on difference between cost basis and FMV at gift date | Deduction at FMV, up to 30% of your adjusted gross income (AGI), with 5-year carryover | Ideal |
| Stock received upon Nonqualified Stock Option (NSO) exercise held greater than 1 year from exercise | Ordinary income tax on the difference between the exercise price and the stock's FMV at exercise | Eliminate capital gain recognition on difference between cost basis and FMV at gift date | Deduction at FMV, up to 30% of your AGI, with 5-year carryover | Good |
| Stock received upon Incentive Stock Option (ISO) exercise held greater than 1 year from exercise and 2+ years from grant§ | No ordinary income tax, although Alternative Minimum Tax (AMT) may apply | Eliminate capital gain recognition on difference between cost basis and FMV at gift date** | Deduction at FMV, up to 30% of your AGI, with 5-year carryover | Good |
| Vested RSUs and RSAs held 1 year or less | Ordinary income tax on difference between FMV at vesting and amount paid for your stock | No advantage to selling your stock and donating cash proceeds†† | Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover | Good |
| Stock received upon NSO exercise held 1 year or less | Ordinary income tax on difference between exercise price and your stock's FMV at exercise | No advantage to selling your stock and donating cash proceeds†† | Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover | Good |
| Unvested RSUs and unexercised ISOs | Not transferrable to charity | Not transferrable to charity | Not transferrable to charity | Unacceptable |
| Unexercised NSOs | Not applicable | Generally, not transferrable; exercise by charity may result in ordinary income tax to you | Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover | Unacceptable |
| Vested Performance Stock Units (PSUs) and Performance Stock Awards (PSAs) held greater than 1 year from vesting | Ordinary income tax on difference between FMV at vesting and amount paid for your stock | Eliminate capital gain recognition on difference between cost basis and FMV at gift date | Deduction at FMV, up to 30% of your AGI, with 5-year carryover | Ideal |
| Vested PSUs and PSAs held 1 year or less from vesting | Ordinary income tax on difference between FMV at vesting and amount paid for your stock | No advantage to selling your stock and donating cash proceeds†† | Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryover | Good |
| Employee Stock Purchase Plans (ESPPs) Tax-qualified ESPPs held greater than 1 year from purchase and greater than 2 years from the grant | No ordinary income tax, although you must meet holding period requirements prior to gifting or there may be income recapture | Eliminate capital gain recognition on difference between cost basis and FMV at gift date. Recognize ordinary income on the discount amount. | Deduction at FMV, up to 30% of your AGI, with 5-year carryover | Moderate |
| Stock Appreciation Rights (SARs) | Generally, not transferrable; any transfer may result in adverse tax impact to you | Unacceptable |
Disclosures
*This generally is senior officers, directors, and shareholders with greater than 10% equity.
† Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission. The regulation provides an exemption that allows the public resale of restricted, unregistered, and control securities if a number of conditions are met. This includes how long the securities are held, the way in which the securities are sold, and the amount of securities that can be sold at a certain time.
§ Tax treatment of ISO stock transferred to charity before holding period requirements are met is not included. Please consult with appropriate tax or legal advisor on specifics.
** Difference between FMV at exercise and exercise price is an AMT preference item included in your AMT calculation. You may lose AMT preference item on contribution.
†† 60% of AGI deduction limit with a five-year carryover is permitted for charitable contributions of cash. Note: any short-term capital gains tax paid reduces value of gift to charity.
§§ Additional considerations are involved when gifting restricted stock. You may own stock acquired from equity compensation awards that, due to your status as an executive in the business or other factors, may have resale restrictions. Donating restricted stock may require due diligence by the charity prior to acceptance, as the gifting process can involve certain additional paperwork and regulatory filings.
Case study: Charitable tax planning opportunity
Cheryl is a senior executive of TechCo, a technology company that recently went public. She has accumulated a significant amount of restricted stock from the vesting of RSUs that she has held for more than one year.
Cheryl is eager to plan for her family's future and charitable giving is a big part of her goals. In addition, she has always been charitably minded and will have an unusually high income this year, so a charitable gift could help her to minimize tax exposure.
After speaking with her financial advisor, Cheryl learns about how she can easily fund a donor-advised fund account to receive a current-year tax benefit while making more money available to charity over time.
Cheryl decides to fund a donor-advised fund account with $1 million of company stock, with a cost basis of $50,000. By donating $1 million of TechCo stock directly to charity, as shown in Option 2 below, Cheryl eliminates $190,000 in projected federal capital gains taxes and this money is instead available to grant to charities through her donor-advised fund. She also has an additional $260,300 in tax savings from her claimed income tax deduction.
For illustrative purposes only.
