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Abstract: 

The IRS has issued proposed regulations under IRC §§162, 164, and 170 regarding the tax treatment of payments to charitable entities in exchange for consideration, including state and local tax credits. These new regulations follow final regulations issued in June 2019 that address whether a taxpayer may claim a charitable contribution deduction when he receives or expects to receive a corresponding state or local tax credit. The impetus for the new rules is found in new IRC §164(b)(6) (added by the Tax Cuts and Jobs Act of 2017 ), which limits an individual’s deduction for state and local taxes paid to $10,000 per year ($5,000 in the case of a married individual filing a separate return) for tax years 2018-2025. As a result of the limitation, individuals may not be able to claim a federal income tax deduction for the entire amount of property tax and income or sales tax they pay. In response, to avoid or mitigate the effect of the limitation, some taxpayers have tried to rely on state and local tax credit programs under which states provide tax credits in return for contributions to entities described in IRC §170(c), including states and political subdivisions. Since the $10,000 limitation was enacted, state and local governments have created additional programs designed to work around the new cap. The June 2019 final regulations eliminate the work-around, providing that if a taxpayer makes a payment or transfers property to or for the use of an entity described in IRC §170(c) and receives in exchange a state or local tax credit that is more than 15% of the amount of the contribution, the taxpayer’s charitable contribution deduction under IRC §170(a) is reduced by the amount of the credit.

Keywords: Treasury Notice 2019-12; State or Local Tax Credits; Quid Pro Quo Principals and §1.170A-1(h)(2)

Affiliations:  1: Strasburger & Price LLP.