If an individual wants to give LLC units to your organization, be careful! Potential problems lie ahead for both the donor and your organization.

Here’s why, by way of an example. Suppose the gift is of 10% of all the outstanding LLC units. It’s necessary to analyze the gift on two levels.

First level: Donor will be deemed to give the LLC units. If the donor claims the units have a value of more than $5,000, the donor will need to get a qualified appraisal.

Second level: Here’s where things get tricky. The donor may need to adjust the charitable deduction the donor claims for this gift. That’s because the gift will be deemed to consist of 10% of each and every LLC asset.¹

• If one of the assets is a fully depreciated computer, the donor will need to ratchet the charitable deduction downward to take the depreciation into account.
• If one of the assets is land and a building, depreciation again may have to be taken into account.
• Furthermore, if one of the assets is debt-encumbered, the bargain sale rules will need to be applied with respect to that asset.

“Ugh!” is right. This gift may be a tax-reporting mess for the donor. But that’s not all. This gift may produce unrelated business income (UBI) for your organization.²

By the way, don’t expect the donor’s tax advisor to know all this. Chances are the tax advisor has never dealt with this kind of situation.

Chances are, also, that when all the facts concerning the LLC and its assets are laid on the table, either the donor or your organization will walk away from the gift.
 

By Jon Tidd, J.D.
 

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1.The asset-by-asset approach needs to be taken if the LLC has elected to be taxed as a partnership. LLCs routinely are taxed as partnerships. ↵

2. UBI can arise from asset-encumbered debt or from the LLC’s business operations. ↵