October 17, 2020 - Douglas Myser

Final regulations for charities. The IRS issues final regulations on the treatment of payments made to charitable organizations in return for consideration, including in return for state and local tax credits. The regulations finalize proposed regulations issued in December 2019 and also incorporate two earlier pieces of IRS guidance, Rev. Proc. 2019-12 and Notice 2019-12, as well as addressing other issues. The final regulations provide further guidance on the issue of states and taxpayers attempts to avoid the $10,000 cap on state and local tax deductions by making charitable contributions, instead . The IRS says it received over 40 comments on the proposed regulations: the final regulations adopt the proposed regulations with some clarification. Final regulations for charities.

The new final regulations update the current Sec. 162 regulations to reflect statutory changes on how Sec. 162 applies when taxpayers make a payment to a Sec. 170 (c) charitable organization for business purposes. They also provide safe harbors under Sec. 164 for payments made to a Sec. 170(c) organization by individual taxpayers who itemize and receive or expect to receive a state or local tax credit in return for the payment. Finally, they update the regulations to reflect past guidance and case law on the application of the quid pro quo principle under Sec. 170 to benefits received or expected to be received by a donor from a third party.

The preamble to the final regulations notes that it retains the proposed amendments to Regs. Sec. 162-15(a), which clarify that a taxpayer's payment or transfer to a Sec. 170(c) entity may constitute an allowable deduction as a trade or business expense under Sec. 162, rather than a charitable contribution. The final regulations also retain the examples demonstrating the application of this rule with minor clarifications.  In addition, the final regulations retain the Sec. 162 safe harbors to provide certainty about the treatment of payments business entities make to an entity described in Sec. 170 (c).

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