Entrepreneurs can avoid taxes by donating their companies

2022-10-15 06:45:00 By : Ms. syndra mia

Entrepreneurs tend to hate paying taxes, and they love supporting pet causes. Now it's becoming clearer how they can pass entire billion-dollar companies through a charitable loophole.

Why it matters: The tax code has incentives for owners to give their companies to non-profits. For the time being, such transactions remain relatively rare — but they seem certain to accelerate.

Driving the news: In the past year, at least two billion-dollar companies have been donated to obscure 501(c)(4) nonprofits — Tripp Lite, which makes electrical devices, and then, this week, Patagonia, which makes outdoor gear.

Details: Tripp Lite was donated by its founder, Barre Seid, to a group called the Marble Freedom Trust that immediately sold the company to Eaton Corporation for $1.6 billion, in a series of transactions documented by ProPublica and the NYT.

How it works: The richest people in America tend to get that way not by earning money but by owning very large stakes in companies. When those stakes rise in value, no tax is payable unless and until they are sold.

The big picture: Hundreds of billionaires have signed the Giving Pledge, promising to give most of their wealth to charity. Until recently, it's been very unclear how that is likely to work, in practice. But now there are models that can be replicated.

The impact: Patagonia and Tripp Lite will continue to pay corporate income taxes, unlike the many hospitals and universities that are run as businesses and control billions of dollars but that bask in tax-exempt status. But the U.S. government will never get a take of any of their massive decades-long increase in value.

Marble Freedom Trust and Holdfast Collective are at opposite ends of the political spectrum, but have similarly outsized ambitions.

Between the lines: Both U.S. entrepreneurs were able to choose or even found nonprofits that were entirely aligned with their own visions. For the foreseeable future, the money will get spent in exactly the way that the billionaires wanted it to be spent.

What to watch: While Marble Freedom Trust is the more explicitly political of the two, the only way that Holdfast is going to be able to achieve its goals is by getting governments on board. Both organizations are ultimately in the business of spending money to try to bend democratic institutions to their will.