Contributions to Charities’ Single Member LLCs

For years, taxpayers and their advisors have wondered whether contributions to charities’ single-member LLCs are deductible. The IRS has issued Notice 2012-52 advising taxpayers that if all other requirements for deductibility are met, contributions to domestic, charitable single-member LLCs (LLCs wholly-owned and controlled by a single U.S. charity) will be treated as a charitable contribution to a branch or division of that charity.

Background

Charities frequently create charitable single-member limited liability companies (charitable single-member LLCs) because, like a separate corporation, charitable single-member LLCs 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 single-member LLC is exempt. There is also no need for the charitable single-member LLC to apply for tax-exempt status or file a separate Form 990.[1]

Charitable single-member LLCs are relatively easy to create and maintain. The ability to avoid a separate application process and filing separate annual Form 990s make the charitable single-member LLC an attractive option when some degree of asset protection is desired.

However, charities have hesitated to use charitable single-member LLCs in certain circumstances due to lingering ambiguity about the tax treatment of contributions to charitable single-member LCC subsidiaries.

Logically, most practitioners have always believed that if the LLC is ignored for tax purposes, it makes sense to treat contributions to the charitable single-member LLC as a contribution to the charity itself, but there has until now been no specific IRS authority for that position.

Single Member LLC Contribution

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 charitable single-member LLC.

Given this ambiguity and the Service’s history of aggressively challenging charitable income tax deductions, gifts to charitable 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 charitable single-member LLC is wholly owned by the sole member and treated by its sole member as a disregarded entity for tax purposes.

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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.