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Charitable Donations and SALT


Patrick Michael

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IR-2018-172, Aug. 23, 2018

WASHINGTON — Today the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit.

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.

Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

 

People in high tax states will not be happy about this.  When I first heard about this attempt to get around SALT I figured the IRS would do something like this.  I'm sure there will be a new round law suits challenging the new regulations.  I live in NY and wish the politicians would but as much effort into finding ways to reduce taxes as they do trying to create a loop hole to get around SALT. 

 

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The best workaround that I have read about would have the states tax S Corporations and Partnerships at the entity level since state and local taxes

on business profits at the entity level are always deductible. I wonder, if it would be possible to structure a state or local tax

at the  Schedule C or Schedule E level ? Hmmmm

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NY is looking at creating a new employer payroll tax to replace income tax on wages.  The business would be able to deduct the tax (as they do other payroll taxes) but I doubt many employers would (or could afford to) just eat the difference between added tax liability and the tax benefit they would receive by deducting the additional expense.  The only way I can see this working is if the employer reduced wages to make up for the added net expense.   NY is not very business friendly as it it is and I can see this as the final straw for many businesses.  They would have to shut down or reduce their staffing levels, specially businesses that rely on minimum wage employees, as these businesses would not be able to reduce wages to make up the difference. 

As an example of how this would disproportionately effect low wage earners is the local McDonald's.  NY is ramping up the minimum wage to $15 an hour and as a result, by the end of 2019, all the local McDonald's will have installed ordering kiosks and automate many of the cooking tasks in order to reduce payroll.  And  local pizza franchiser  closed all five of his locations recently citing the minimum wage increases as one of the reasons he could no longer afford to stay in business.

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55 minutes ago, Patrick Michael EA said:

local McDonald's will have installed ordering kiosks

McDonald's would install these regardless of the minimum wage.

56 minutes ago, Patrick Michael EA said:

closed all five of his locations recently citing the minimum wage increases

I smell BS. Besides, if your business model depends on poverty level wages, it's not a viable business.

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Copied from Tax Pro Today:

 

 

Connecticut Pass-Through Tax

Connecticut Governor Dannel Malloy signed legislation in May that sets a 6.99 percent levy — the state’s top marginal individual income tax rate — on pass-through entities, which report their income on owners’ personal returns.

Pass-through owners then get a credit equal to 93 percent of the owner’s share of tax paid by the business. The strategy effectively lets pass-through owners take bigger federal write-offs to help offset their previously unlimited SALT deductions.

For example, if a Connecticut partnership has two partners and $1 million in income in total, it would pay the state $69,000 under the new pass-through entity tax. That would leave $931,000 of taxable income to pass along to the two partners. The two partners could deduct 93 percent of that $69,000, or $32,085 each, from their federal tax bills — an offset that could compensate for the SALT cap.

Still, some tax professionals aren’t sure the state’s plan, which took effect on Jan. 1, will work.

Depending on how much income your pass-through makes, the workaround “might not cover your SALT bill,” said John Ermer, an accountant and tax partner at Beers, Hamerman, Cohen & Burger in New Haven, Connecticut.

If the IRS were to issue regulations striking down these types of arrangements, or the arrangements were challenged in an audit, taxpayers could be in a position where they pay the state more than their tax bill was in the first place, said Michael D’Addio, a principal at accounting firm Marcum.

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I never believed the "charitable deduction" in lieu of property taxes would fly, but I think CT's entity tax might.  The problem is that it was passed late in May and not announced until a couple of days before the second estimate was due.  Therefore all partnerships and S corps are already behind in their estimates, which they never had to pay before and didn't find out about until it was too late.  CT offered to waive interest and penalties if the members have been paying their own estimates and choose to assign those to the entities (no clue how they might do that).  Otherwise interest and penalties apply to the entities for not paying estimates that didn't exist until late in the second payment cycle.  Parties can appeal to the state legal dept, which never approves anything.  The waiver should be automatic because of the late enactment, but now state taxpayers have to pay lawyers to review each instance.  Absurd.

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  • 2 weeks later...

IR-2018-178, Sept. 5, 2018

WASHINGTON — Business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses, the Internal Revenue Service said today.

Responding to taxpayer inquiries, the IRS clarified that this general deductibility rule is unaffected by the recent notice of proposed rulemaking concerning the availability of a charitable contribution deduction for contributions pursuant to such programs. The business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense. Therefore, businesses generally can still deduct business-related payments in full as a business expense on their federal income tax return.

The key phrase here is "business related payments". So what would be a qualifying business related payment ?

How wide or narrow is this definition ?

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