The IRS has published welcome, long-awaited guidance regarding the deductibility of contributions made to a single-member limited liability company (LLC) owned by a charitable organization.
For a variety of reasons, tax-exempt charitable organizations frequently establish single-member LLCs that are wholly owned and controlled by the charitable organizations. Unless a single-member LLC elects to be treated as a corporation, the LLC is disregarded for most tax purposes. A charitable organization that wholly owns a single-member LLC treats the operations and finances of the single-member LLC as its own for tax and information reporting purposes.
For employment and certain excise tax purposes, however, the single-member LLC is treated as separate from its owner and is required to file separate tax returns. The deductibility of contributions to a single-member LLC owned by a charitable organization (as opposed to contributions to the charitable organization itself) has long been uncertain: should it be treated as a regarded or disregarded entity?
The IRS addressed the issue on July 31 in Notice 2012-52, stating that it will treat contributions to a single-member LLC that is disregarded for income tax purposes as contributions to a branch or division of the charitable organization. Therefore, if contributions to the charitable organization itself are deductible for purposes of the donor's federal income taxes, contributions to the single-member LLC owned by the charitable organization also will be deductible (provided that the single-member LLC, like the charitable organization, is organized under U.S. law, and that it has not elected to be treated as a regarded entity for income tax purposes). The IRS recommends that, on substantiation provided to the donor, the charitable organization indicates that the contribution was to a single-member LLC wholly owned by the charitable organization.
Notice 2012-52 is effective for contributions made on or after July 31, 2012. However, taxpayers also may rely on the notice for contributions made prior to July 31, 2012, if the limitations period for refund or credit is still open. For that reason, a taxpayer who previously made a contribution to a single-member LLC owned by a charitable organization but did not deduct the contribution should investigate the possibility of a refund.