SALT Update: Proposed Regulations Won’t Restrict Business Deductions, But Impact Likely Still Severe

We discussed last week the proposed regulations that will limit the charitable deduction for contributions to state tax credit programs, like Colorado’s enterprise zone and child care contribution credits—and the disastrous effect this can have on charities. The IRS recently has announced that the proposed regulations won’t similarly limit the deductibility of business expenses—in other words, a workaround appears to be available for businesses.

To put this in context, a taxpayer with more than $10,000 in state and local taxes who makes a $10,000 contribution to an organization eligible for a child care contribution credit of $5,000 will only get a federal charitable deduction of $5,000 (the excess of $10,000 full contribution minus the $5,000 credit amount).

However, if a similarly situated business makes a sponsorship payment of $10,000 to an organization eligible for that same $5,000 credit—for example, to be a lead sponsor of the organization’s fundraising event with logo recognition—the numbers will change. The organization likely will be able to deduct the full $10,000 as an ordinary and necessary business expense—here, as a marketing expense.

But practically, most charitable donors will be individuals, not businesses, so tax-exempt organizations still stand to lose out on many donations as a result of the proposed regulations. As such, exempt organizations offering credits should strongly consider making comments to the proposed regulations. The IRS is accepting comments through October 11, 2018. Comments can be submitted on or to the following addresses:

Submissions may be mailed to Internal Revenue Service, CC:PA:LPD:PR (REG-112176-18), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-112176-18), Courier’s Desk, 1111 Constitution Avenue NW, Washington, DC 20224

Also, click here for analysis of the proposed regulations by the Colorado Nonprofit Association, including a policy update and suggestions on comment language.

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