Safe Harbors for Business Deduction of Payments Made in Exchange for SALT Credits (Rev. Proc. 2019-12)

The IRS sets safe harbors for businesses in Rev. Proc. 2019-12 that let them deduct certain payments made to a charity in exchange for a state or local tax (SALT) credit.

Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose.

Charitable Contributions and SALT Limit

An individual’s itemized deduction of SALT is limited to $10,000. The limit is $5,000 when married filing separately. Some state and local governments have laws that allow individuals to get a state tax credit for contributions to charitable funds owned by the state and/or local government.

Under proposed regulations, however, an individual, estate, and trust generally must reduce the amount of a charitable contribution deduction by the amount of SALT credits they receive or expect to receive for for making the contribution.

A de minimis exception allows a taxpayer to disregard up to 15% of the payment or transfer to the charitable organization.

C Corporations

If a C corporation makes the charitable payment in exchange for a state and local tax credit, it may deduct the payment as an ordinary and necessary business expense. The deduction is limited to the amount of SALT credits the C corporation receives or expects to receive.

Specified Pass-Through Entity

A specified pass-through entity may also deduct the payment as an ordinary and necessary business expense. However, a deduction is allowed only if the SALT credit applies or is expected to apply to offset a SALT other than an income tax.

A specified pass-through entity for this purpose is any business entity other than a C corporation that is regarded as separate from its owner for all federal income tax purposes, i.e., disregarded entity. The entity also must:

  • operate a trade or business within the meaning of Code Sec. 162; and
  • be subject to SALT incurred in carrying on that trade or business.

Effective Date for Safe Harbors in Rev. Proc. 2019-12

The safe harbors apply to payments made to a charitable organization in exchange for a SALT credit on or after January 1, 2018.

Rev. Proc. 2019-12

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