IRS issued final regs (T.D. 9864) reiterating if a taxpayer receives or expects to receive a state or local tax deduction exceeding the amount of the payment or fair market value of the property, the federal charitable contribution deduction faces mandatory reduction. The final regs largely mirror the proposed regs of August 2018 with little substantive change. We are all aware of the rules, including even the 15% de minimis exception, which effectively killed the state workarounds to the $10,000 Schedule A limitation. The final regs keep those workarounds dead with the only hope of resurrection through the courts. Keep in mind litigation is still pending since New York, Connecticut, Maryland, and New Jersey sued the IRS and Treasury seeking to declare the $10,000 limit as unconstitutional. Oral argument is scheduled for this month.
More interestingly, Notice 2019-12 (June 11, 2019) provides a safe harbor for individuals to treat these state credits and resulting disallowed charitable contributions as a payment of SALT for the tax year of the payment or the preceding year. Thus, under the $10,000 limitation, there is an opportunity for tax savings by amending the previous year’s return. Excess credits are carried forward. A transfer of property, though, would not qualify for the protection of the safe harbor.
Remember that corporations and some pass-through entities can continue to deduct the contributions made for state or local credits as ordinary and necessary business expenses. But perhaps the most surprising aspect of these developments is the fact there is no special treatment for any particular category of donee. A number of commentators pointed to conservation easements and school tuition vouchers as possible exceptions to contribution reductions, but the final regs contain no such preferential carve-outs.
We anticipate additional planning guidance to issue frequently in order to cover other aspects of the TCJA. Our books are continually updated to reflect these latest changes. For more information, consider registering for The Best Individual Tax Update Course by Surgent or The Best Federal Tax Update Course by Surgent.
Nick Spoltore is VP of Tax & Advisory Content for Surgent CPE. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent, he practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.