LLC and Charitable Contributions

[S T]

Have a new Client

Here is the Question from Client - New LLC - operating as a Partnership 3 Members

We also want to do something more with the business, this is where my mom comes in, we want to donate a portion of our earnings to charities. We haven’t set a specific charity up yet but I am sure something will be coming soon. Have you dealt with any companies that are trying to give back? Is it better to setup a separate fund and the company donates or is it better if we as individuals donate outside of the company?

Anyone have any words of wisdom or experience on this? Or any suggestions! - It is only a 4 month old Company - still navigating through the set up - showing a small loss, but I have known these T/P for 30 years and everything they set out to do is always accomplished. This however, is their first "Venture" on their own. In the past they put forth the efforts were rewarded very nicely as employees - this time they decided to do it on their own - as Owners.

Mom- as referred to above has a great track record working with one of the "leading" Charitable Organizations and Fund Raising, organization,compliance of Reporting and Record Keeping. ( I was involved as a Consultant on some of those issues for compliance)

Thanks for any thoughts

Sandy

[ttbtaxes]

Who do they want to receive credit, and acknowledgment, for the donations? The business or the individuals? If the main purpose is to promote the business, then it should make the donations rather than the individuals. However, if the individuals are going to bicker about the appropriate amount for the business then they should consider doing it themselves..

Everything flows through the LLC and is deducted on their individual returns.

[Super Mom]

My thoughts on this is that with a partnership, it flows to K and they get the deduction on personal, so it's personal either way they do it. That's what I'm thinking. They may want the contribution to be recognized as from the business by the charity or public but that's the only way I would see it matters.

[BHoffman]

I agree with Super Mom. The partnership doesn't deduct charitable contributions and it is a K-1 item that flows to the individuals' Sch A forms. See the chart in TTB pg. 20-2 "Charitable Contributions".

If the partnership donates and receives some public recognition for their charity with the aim of showing itself to be socially responsible in order to drum up business, is it an advertising expense that is deductible by the partnership?

[Gretel]

Yes, it could be advertising, depending on extend of recognition and $$ involved. If mom wants to start her own 501(c)3 then it might be a little more tricky with related party rules but if mom is just working for another 501(c)3 that might be different.

[JohnH]

I agree with the other posts that the charitable contribution deduction passes throught to the LLC members on their K1's in proportion to their ownership interests. Net tax benefit is the same no matter whether the LLC makes the contributions or whether the individual owners make them. The only reasons for the entity to make the contributions woud be if there is a desire to make sure that all the owners give as intended, that the entity receive recognition, or for some other non-business consideration.

If the charitable contributions are expected to be significant, there is another thing to think about here. There is a hidden value in electing S- corp status. If the charitable contributions are made by a partnership, they are also included in self-employment income before being deducted on the personal return. But if the entity is an S-corp, then the flow-through works the same way but there is no self-employment tax assessed on the net income from the entity. So there is a hidden tax savings of about 12-14% (the net tax cost of the self-employment tax) by making charitable contributions through an S-corp.

To continue that line of reasoning, this is also a consideration if the entity plans to set up SEP IRA accounts for the shareholder-employees. The SEP payments are made at the entity level and they bypass Social Security/Medicare withholding/matching (or to look at it in relation to the partnership, they bypass self-employment tax)

[S T]

Thanks everyone for the great information. I knew that from a Partnership and Charitable Contribution it would flow through via the K-1 form to the Individuals, just was not sure what to provide the client and the best way to approach.

With all of your Great Posts, I can then provide more information for them to digest.

I appreciate all of you so much

Sandy