Final Treasury Regulations (Regulations) published June 13, 2019, in the Federal Register require taxpayers to reduce any federal charitable contribution deduction by the amount of any state or local tax (SALT) credit received (or expected) in return, with certain exceptions. The Regulations, effective August 12, 2019, are mainly based on the “quid pro quo principle,” and apply to amounts paid, or property transferred, as charitable contributions by individuals, trusts, and estates after August 27, 2018.
At the same time the Regulations were issued, the IRS also issued Notice 2019-12, which indicates the agency’s intent to issue proposed regulations in the near future covering the essence of the Notice’s content. As discussed below, the Notice provides a limited safe harbor, in addition to the exceptions contained in the Regulations.
Charitable Contributions in General
To qualify as federal deductible charitable contributions, payments and transfers must be made as contributions or gifts to, or for the use of, specified charitable entities.1
A contribution or gift for this purpose is a voluntary transfer of money or property made with charitable intent (i.e., with the intention of making a gift) and without the actual or expected receipt of adequate consideration.
Specified entity-recipients of qualified charitable contribution payments and transfers include certain corporations, trusts, funds, foundations, or community chests organized and operated exclusively:
- For religious, charitable, scientific, literary, or educational purposes;
- For fostering national or international amateur sports competition; or
- For preventing cruelty to children or animals.
Additionally, a state or possession of the United States (or any of their respective political subdivisions) and the District of Columbia also are specified entity-recipients.
The Quid Pro Quo Principle of Charitable Contributions
Quid pro quo is defined as “something given or received for something else.” More than 30 years ago, the U.S. Supreme Court articulated what is now known as the quid pro quo principle ruling there cannot be a “charitable contribution if the contributor expects a substantial benefit in return.”
The quid pro quo principle has long been applied in order to limit charitable contribution deductions. As a result, those deductions can only be taken if, and to the extent that, an actual charitable property transfer or monetary payment exceeds the fair market value of any privileges or benefits received (or expected) by the taxpayer in return, from any source.
The Regulations clarify that whatever benefit or privilege a taxpayer receives in return for a contribution is counted as quid pro quo, notwithstanding whether the source of the benefit or privilege is the contribution’s recipient or any other person, entity, or government.
The Regulation’s Exceptions
There are two exceptions to the Regulations. First, the deduction limitation rule does not apply to SALT deductions taken on state tax returns because they are not deemed to be a quid pro quo unless, in the aggregate, they exceed the amount of the taxpayer’s charitable contribution. Should the state-level SALT deductions for a contribution exceed the taxpayer’s actual contributions (i.e., the aggregate payment amounts and/or fair market values of transferred properties), then the state-level SALT deductions are treated just like SALT credits and are limited under the Regulations.
Secondly, the deduction limitation rule does not apply to a de minimis amount of SALT credits received by a taxpayer in return for a charitable contribution because they are not deemed significant enough to be a quid pro quo. The de minimis amount is a 15% (or less) SALT credit received in exchange for a charitable deduction. The Regulations make clear that this exception is to be applied to the sum of all of the taxpayer’s SALT credits received or expected in return for charitable contributions.
The Notice’s Safe Harbor
Notwithstanding the rule of the Regulations, the Notice provides a safe harbor that allows for charitable contribution deductions even if SALT credits are received in an amount equal to the contribution. However, this is only possible if the total SALT credits taken in a tax year are less than the federal SALT payment deduction limits enacted by the Tax Cuts and Jobs Act (TCJA). Those limits are a maximum SALT deduction of $10,000 (or $5,000 for married filing separately) per taxable year, as more fully discussed in this recent PYA article. The safe harbor was issued because of the unfair result to individuals, trusts, and estates whose SALT deductions were $10,000 or less, because they could have otherwise deducted those payments if they had contributed the same amount directly to a state-level government authority.
Because the Regulations and Notice are now in effect, taxpayers should exercise caution in planning for and executing charitable contributions2 of money or property so that their expectations are met at both the federal and state tax levels.
For more information about how to navigate the new charitable contribution deduction rules, or if you would like assistance with any matter involving state credits, tax preparation, tax planning, or tax advice, contact a PYA executive below at (800) 270-9629.
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No portion of this article may be used or duplicated by any person or entity for any purpose without the express written permission of PYA.
1 In many instances, the specified charitable entities must meet additional requirements of the U.S. Tax Code in order for contributions to be deemed tax deductible.
2 Other rules apply to charitable contributions made for the business purposes of pass-through entities, with completely different results, including deductions that are not limited by the TCJA’s $10,000 limit after they are passed through to owners on their IRS Forms K-1. Because of those rules, certain states, including Georgia (see Georgia Department of Revenue Proposal to amend Rule 560-7-8-.57 [set for consideration on September 18, 2019]), are now considering new laws, rules, and state credit offerings.