Can an LLC Accept Donations: Everything You Need to Know
Can an LLC accept donations is an important thing to know to avoid problems when it comes to organizing taxes.3 min read
2. Payment for Services
3. How to Take Your Deduction
4. Considerations When Making Deductions
5. Can an LLC Get Tax-Exempt Donations?
6. Section 501(c)
7. Application Requirements
8. Retroactive Tax Exemption
9. Tax-Exempt Donations
Updated June 28, 2020:
Can an LLC accept donations is an important thing to know to avoid problems when it comes to organizing taxes. An LLC and partnership are taxed the same way, which is as a pass-through entity where the profits pass through the business and to the owner's personal tax return.
When it comes to a business making a donation, only a corporation has the ability to write off money that they donate to a charity. Other business entities such as LLCs, partnerships, and S corporations can donate either cash or assets to a charity, but the business does not get to claim it as a tax write-off. Instead, each owner can report their portion as a charitable deduction on their personal tax return. It is important to know that if you donate services, you cannot write those off at all.
Payment for Services
Sometimes a business might be able to take a deduction even if there is something given in return for the money. An example of this would be purchasing ad space in a program of a non-profit. Even if your intentions were not to be charitable, it still could be considered a business deductible expense. You would get the same deduction if you were to pay a trade association in exchange for promoting your business.
How to Take Your Deduction
When an LLC needs to write-off a deduction, all the members will divide the amount the same way that they do any of the other business expenses. If you have three members that have an equal division of income and deductions, each member would be able to write-off one-third of the deduction in Schedule A of their personal tax return.
Considerations When Making Deductions
There are a couple of considerations that you need to take into account when taking deductions for donations including:
- You can only write-off what qualifies as a tax-deductible donation.
- You can only write-off up to 50 percent of your adjusted gross income though some organizations are limited to 30 percent.
- You should always keep your receipts and records in the event of an audit.
Can an LLC Get Tax-Exempt Donations?
An LLC can accept tax-exempt donations that the donor can write-off as tax deductible if the Internal Revenue Service recognizes the business as operating for tax-exempt purposes. To do this, the LLC will need to file a formal application to achieve this status.
The IRS section 501(c) lays out the framework that all organizations must follow if they want to obtain and maintain tax-exempt status. To qualify under section 501(c), the federal government requires an LLC to be a non-profit organization, which means its sole purpose has to fall under one of the following categories:
This does not mean that an LLC cannot make money; it simply cannot distribute this money to members or other businesses. All profits must be reinvested back into the non-profit company.
For an LLC to obtain tax-exempt status, it must apply and be approved by the IRS before it can begin avoiding tax liability on its donations. A representative who is authorized to act on behalf of the LLC will need to prepare and file a Form 1023. This form includes a number of questions so that the IRS can fully assess whether or not the LLC will meet the requirements for tax-exemption. You will need to be able to provide information regarding:
- The structure of the LLC.
- The operating activities of the LLC.
- The compensation that the officers and managers will receive.
Retroactive Tax Exemption
If an LLC obtains success in its application for tax-exempt status, then the LLC may be able to apply to have the exemption be retroactive. In some cases, the IRS can allow the exemption to be retroactive up until the creation of the LLC if the application is filed before the end of the 27th month.
Once the LLC obtains its tax-exempt status, they will no longer need to report received donations as taxable income. They also will be able to assure those donating that the money they contribute will be fully deductible on their personal tax return.
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