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OIRA Completes Review of Proposed Rule on SALT Cap Safe Harbors

Posted on Dec. 6, 2019

A proposed rule regarding the $10,000 cap on the state and local tax deduction and the safe harbors for certain charitable contributions has cleared the Office of Management and Budget’s Office of Information and Regulatory Affairs.

The proposed rule is now back at Treasury and the IRS and will likely be issued within days.

Officials described the proposed rule in June when Treasury and the IRS published final regs (T.D. 9864) shutting down SALT cap workarounds involving charitable contributions made in exchange for state tax credits. Specifically, officials said that by the end of this year, they want to combine into one proposed rule the following items:

  • a proposed safe harbor for individual itemizers under the SALT cap, which Treasury and the IRS described in Notice 2019-12, issued in June with the final regs; and

  • a clarification (Rev. Proc. 2019-12), issued in December 2018, stating that corporations and certain passthroughs can continue to deduct as ordinary and necessary business expenses certain charitable contributions made in exchange for state or local tax credits. The drafters of the Tax Cuts and Jobs Act applied the SALT cap to individuals only. 

The safe harbor for individuals proposed in June would allow itemizers to elect to take as a SALT deduction — up to the $10,000 federal limit — that portion of a charitable contribution made in exchange for a state tax credit. Treasury and IRS officials said such a safe harbor is needed because, under the quid pro quo rule in the final regs, itemizers below the cap could not claim such a payment as a charitable contribution for federal tax purposes. Without the safe harbor, such itemizers also could not claim a payment to a charitable organization in exchange for a state credit as a SALT deduction because it wouldn't be a payment of state tax.

The Georgia Department of Revenue has already drafted language providing guidance on the interplay of that proposed IRS safe harbor and two state-level tax credits for charitable contributions supporting rural hospitals and education. Under the proposed changes, passthroughs would be allowed to make such charitable contributions; any Georgia tax credit allowed would be considered earned by the entity’s individual members, would be limited per member to $10,000 or the actual amount, whichever is less, and would be allowed only for Georgia income on which tax was actually paid by the member. 

"It was recently announced by the IRS, as a position favorable to taxpayers, that all or a portion of a charitable contribution may be recharacterized and allowed federally as a state income tax deduction rather than as a charitable contribution deduction,” the Georgia DOR said in a September notice. “Any such federally recharacterized state income tax deduction will still be considered a charitable contribution deduction for purposes of this credit. Accordingly, if a Georgia tax credit is allowed with respect to all or a portion of that charitable contribution, the taxpayer must add the corresponding deduction back to Georgia taxable net income.”

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