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.
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