Clarity at Last! Contributions to Charities’ Single Member LLCs are Deductible

IRS Okays Charitable Deduction for Gifts to Single Member LLCs of Domestic CharitiesThe IRS has issued Notice 2012-52 advising taxpayers that if all other requirements for deductibility are met, contributions to domestic single-member limited liability companies that are wholly owned and controlled by a U.S. charity will be treated as a charitable contribution to a branch or division of that charity.

Background. Charities frequently create single member limited liability companies (“SMLLCs”) because, like a separate corporation, SMLLCs offer the charity protection from its subsidiary’s legal risks, but are disregarded for federal income tax purposes. As a disregarded entity, the income of a charity’s SMLLC is exempt. There is also no need for the SMLLC to apply for tax-exempt status or file a separate Form 990.[1]

SMLLCs are relatively easy to create and maintain. The ability to avoid a separate application process and filing separate annual Form 990s make the SMLLC an attractive option when some degree of asset protection is desired. However, charities have hesitated to use SMLLCs in certain circumstances due to lingering ambiguity about the tax treatment of contributions to SMLCC subsidiaries. Logically, most practitioners have always believed that if the LLC is ignored for tax purposes, it makes sense to treat contributions to the SMLLC as a contribution to the charity itself, but there has until now been no specific IRS authority for that position.

Contributions to Domestic SMLLCs.
In Notice 2012-52, the Service recommends, but does not require, that the gift receipt to the donor acknowledge the existence and tax status of the LLC. Given this ambiguity and the Service’s history of aggressively challenging charitable income tax deductions, gifts to single member LLCs should be carefully substantiated using a special gift receipt that indicates the sole member’s identity and includes a statement that the LLC is wholly owned by the sole member and treated by its sole member as a disregarded entity for tax purposes.

Effective Date. The Notice is effective for charitable contributions made on or after July 31, 2012. However, taxpayers may rely on the Notice before its effective date for tax years for which the limitation period on refunds or credits hasn’t expired.

 Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.

[1]  Procedure and Administration Regulations § 301.7701-2(c)(2)(i).

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