Tax Reform and State and Local Taxation: IRS Issues Proposed Regulations on Charitable Contributions and State and Local Tax Credits and Deductions

Sullivan & Cromwell LLP - August 24, 2018
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On August 23, 2018, the Department of the Treasury (the “Treasury Department”) and the Internal Revenue Service (the “IRS”) issued proposed regulations (the “Proposed Regulations”) addressing the availability of charitable contribution deductions when a taxpayer receives a corresponding state or local tax (“SALT”) benefit, either in the form of tax credits or deductions.  The Proposed Regulations were issued in response to attempts by various state and local governments, such as New York and California, to allow taxpayers to circumvent the $10,000 cap on SALT deductions instituted by the recent federal tax reform by granting a significant credit against SALT liability for contributions to specified charities.  Taxpayers would effectively substitute charitable contributions for SALT payments and claim a federal charitable contribution deduction, which is not subject to the $10,000 cap.

The Proposed Regulations would reduce the amount of the charitable contribution deduction available for federal tax purposes (the “federal charitable contribution deduction”) in two circumstances.  First, the federal charitable contribution deduction would be reduced by an amount equal to any SALT credit that the taxpayer receives or expects to receive for the charitable contribution made, subject to a de minimis exception if the SALT credit is 15% or less of the amount of the donation.  Second, the federal charitable contribution deduction would be reduced (in a manner yet to be determined) to the extent a charitable contribution is deductible from state or local taxable income in an amount that exceeds the amount of money or fair market value of the property donated.
If finalized, the Proposed Regulations would apply to all charitable contributions made after August 27, 2018.  However, the preamble to the Proposed Regulations indicates that the IRS believes the Proposed Regulations to be a statement of current law, so it is possible that charitable contributions made on or before August 27, 2018, could still be challenged by the IRS