July 2, 2019 - Douglas Myser

SALT deduction cap rules finalized. The IRS issued final rules regarding the availability of charitable contribution deductions under Sec. 170 when a taxpayer makes a contribution to a state or local agency or charitable fund and receives or expects to receive a corresponding state or local tax credit or deduction in return for the contribution. Proposed regulations were issued in REG.-112176-18. The IRS also issued a safe harbor, permitting certain taxpayers who itemize their deductions to treat charitable deductions as state tax payments. SALT deduction cap rules finalized.

Several states have enacted programs that allow residents to make contributions to state or local agencies or charitable funds in exchange for state or local tax credits. These programs are designed to allow individual taxpayers to circumvent the new $10,000 limit on the deductibility of state and local taxes under P.L. 115-97, the law known as the Tax Cuts and Jobs Act, by reducing a taxpayer's deductible state and local taxes paid, while increasing the taxpayers deductible charitable contributions. The preamble to the regulations outlines the history of the IRS's and courts positions on whether a donor has received something of value (a quid pro quo) in return for the charitable contribution, in which case the deduction under Sec. 170 must be reduced or eliminated.

he IRS received almost 8,000 comments on the proposed regulations and 25 requests to speak at the public hearing. Most of the comments were positive, urging the IRS to adopt the proposed regulations without change. One group of commentators objected to the IRS's issuing regulations under Sec. 170 when the change in law was to Sec. 164, but the IRS disagreed. IT found, after careful review of the issue, that long standing principles under Sec. 170 should guide the tax treatment of these contributions. Another group of commentators argued that the IRS should not apply a quid pro quo analysis but use a substance over form approach instead. The IRS declined to adopt that suggestion, having determined the quid pro quo principle provides a more sound, comprehensive, and administrable approach.

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