Proposed Regulations on Charitable Contribution Deductions

The Department of Treasury and IRS have released proposed regulations under Section 170, which gives guidance on charitable contributions. The proposed regulations detail whether you may receive a full deduction on your federal tax return for your charitable contributions when you are expected to receive a corresponding state or local tax (“SALT”) credit for those contributions.

Section 170 generally allows itemized tax deductions for charitable contributions each tax year. The new proposed guidance states that if you make a charitable contribution and receive a SALT credit in return, you must reduce your charitable deduction by the amount of any SALT credit you receive. Therefore, you may only deduct on your federal tax return the difference between your charitable contribution and the SALT credit. Under the new guidance, if your SALT credit is 80%, and you contributed $2,000, you would have a 20%, or $400, charitable contribution deduction on your federal tax return. The rules also extend to trusts or estates that have made charitable contributions.

These proposed regulations are a direct response to states that are attempting to create workarounds on the SALT deduction cap. The Tax Cuts and Jobs Act sets a limit on SALT deductions for an individual at $10,000 (or $5,000 if married filing separately). In response, multiple states, especially those with high tax burdens, began offering tax credits for donations to state-sponsored charities. As a result, these SALT credit programs give taxpayers a potential means to circumvent the $10,000 limit by substituting an increased charitable contribution deduction for a disallowed SALT deduction. These proposed regulations are set to apply to contributions made after August 27, 2018.

Since the proposed regulations were released, the IRS has clarified that businesses that deduct payments to charities in exchange for SALT credits can still make those deductions if the payments are ordinary and necessary business expenses.

These limitations may have you wondering what the best approach is for maximizing both your state tax deductions and your charitable contributions. If you have questions, contact a member of Cherry Bekaert’s Tax team. Our dedicated team of tax experts at Cherry Bekaert can explain the details of these changes specific to your situation, and help you determine which actions are best for your business.