Tuesday, June 18, 2019
Final SALT 170 Regulations Hold the Course; Notice Provides Safe Harbor for Taxpayers With SALT Below SALT Deduction Limit
The Treasury Department and IRS just issued the final regulations under Internal Revenue Code section 170 relating to the effect of state and local tax (SALT) credits on charitable contribution deductions (T.D. 9864). The final regulations generally track the proposed regulations, in that they require taxpayers to reduce the amount of their deduction by any SALT credits received or expected to be received because such credits constitute a return benefit to the taxpayer. They also retain an exception for credits that do not exceed 15 percent of the taxpayer's payment (or the fair market value of property transferred), and continue to not apply to SALT deductions unless the deduction exceeds the payment (or the fair market value of property contributed). While most of the over 7,700 comments supported finalizing the proposed regulations without change, some comments questioned various aspects of the proposed regulations, including the position that SALT credits are return benefits that should reduce the charitable contribution deduction in this instance, but for the most part Treasury and the IRS did not follow these critical comments. This included rejecting calls to push back the effective date of August 27, 2018 contained in the proposed regulations.
At the same time, the IRS issued Notice 2019-12. It states that Treasury and the IRS intend to issue a proposed regulation creating a safe harbor under Code section 164 that would allow certain taxpayers to treat as a SALT payment the disallowed portion of the charitable contribution deduction. This safe harbor would be available for taxpayers who itemize deductions for federal income tax purposes and have state and local tax liability under the $10,000 limit on SALT deductions. Those taxpayers would be permitted to deduct under section 164 the amount of SALT offset by the credits, until they reach the SALT deduction limit. This safe harbor join the Revenue Procedure 2019-12 safe harbor for business taxpayers who make business-related payments to charities or government entities and receive SALT credits in return; that safe harbor allows those taxpayers to still deduct the full amount of those payments as business expenses under Code section 162.
Previous Blog Coverage: Grewal on Why the Proposed Regulations May Be Doomed; Proposed Regulations Hearing; Rev. Proc. 2019-12.