Many tax-exempt organizations use single-member LLCs (SMLLCs) to perform activities or hold their investments because they offer liability protection and are disregarded for federal income tax purposes. Their status results in no separate federal tax filings, and the activities are treated as part of those of the tax-exempt parent. Still, as always, complexities arise—and when it comes to SMLLCs, there are exceptions to the characteristics above. Let’s review a few of the specifics.
California Requirements
SMLLCs doing business in California are required to file Form 568 annually. They are also required to submit two related payments:
- A minimum tax liability of $800
- An annual fee based on total income derived from California
The California income-based fee ranges from $0 to $11,790. The tax-exempt status of the parent organization doesn’t extend to the SMLLC for these purposes.
Property Tax Exemptions
The Idaho Supreme Court determined in the case Idaho Youth Ranch Inc. and Idaho Youth Ranch Nagel Center LLC v. Ada County Board of Equalization that property held by an SMLLC that is owned by a charitable entity doesn’t qualify for property tax exemption.
The SMLLC in this case had a triple net lease with the charitable parent; holding the property and leasing it to the parent was its only purpose and activity. The Supreme Court concluded the SMLLC wasn’t eligible for a property tax exemption because the LLC rented the entire property.
Note that the rules in this area are state-specific, and other states (such as California, Oregon, and Washington) have come to different conclusions with similar fact patterns.
Donations to Charity-Owned SMLLCs
On the brighter side, the IRS clarified in Notice 2012-52 that contributions made to a domestic SMLLC that is owned and controlled by a US charity are treated as charitable contributions to a branch or division of the charity.
The charity is the donee organization for purposes of substantiation and disclosure requirements. As such, the charity should disclose in acknowledgments of donations or other statements to donors that the LLC is wholly owned by the charity and treated by the charity as a disregarded entity to avoid unnecessary inquiries by the IRS.
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Depending on the structure of your organization and the work you perform, an SMLLC may be a good tool to consider for a variety of reasons. Still, it’s important to keep in mind the state implications when weighing their benefits and disadvantages.
For questions about SMLLCs and insight on whether forming one may be beneficial for your organization, contact your Moss Adams professional.