On July 31, 2012, the IRS issued Notice 2012-52 (the "Notice") providing confirmation that a charitable contribution to a single-member limited liability company that is wholly owned by a charitable organization and classified as a disregarded entity for federal income tax purposes (a "SMLLC") will be treated as a contribution to a branch or division of the charitable organization. Consequently, a contribution made to a SMLLC will be deductible for tax purposes to the same extent as a contribution made directly to its sole member, the charitable organization.
What You Need To Know
- Generally, a "disregarded entity" is a business entity that has a single owner and is not classified as a corporation under Treasury Regulation 301.7701-2(b). Such entity is disregarded for federal income tax purposes as an entity separate from its owner.
- Treasury Regulation 301.7701-2(a) provides that the activities of a disregarded entity are treated in the same manner as a sole proprietorship, branch, or division of the owner. A domestic charity that wholly owns a disregarded entity must treat the operations and finances of the disregarded entity as its own for tax reporting purposes.
- It is common for charities to create SMLLCs because, like separate corporations, SMLLCs offer liability protection but are disregarded for federal income tax purposes. As a disregarded entity, the income of a charity's SMLLC is exempt. An SMLLC does not need to apply for tax-exempt status or file a separate annual tax return.
Key Concepts Taken From the Notice
- Fundraising with these types of entities will now be streamlined as donors can contribute directly to the SMLLC, rather than making a contribution to the parent charitable organization for the benefit of the SMLLC.
- In order to limit IRS inquiries into the charitable receipts of a SMLLC, the IRS is encouraging charities to fully disclose that the SMLLC is wholly owned by its parent charitable organization.
The Notice is effective for charitable contributions made on or after July 31, 2012. However, taxpayers may rely on the Notice prior to its effective date for taxable years for which the period of limitation on a refund or credit under Section 6511 of the Internal Revenue Code has not expired.
What You Need To Do Now
You should determine if any of the projects relating to tax-exempt organizations in the 2011-2012 Priority Guidance Plan are applicable to your organization, and contact a member of the Polsinelli Shughart Nonprofit Organizations group if you have any concerns or questions about these projects.