Groups Seek Fix for Potential SALT Cap Workaround

January 31, 2020

Ms. Mon Lam
Attorney
Department of the Treasury
Internal Revenue Service
1111 Constitution Avenue NW.
Washington, DC 20224

RE: IRS REG-107431-19

Dear Ms. Lam:

Public Funds Public Schools (PFPS) is a collaboration of Education Law Center, the Southern Poverty Law Center, SPLC Action Fund, and Munger, Tolles & Olson LLP that strives to ensure all public funds for education are used to maintain and support public schools. PFPS writes to comment on a specific aspect of Regulation 107431-19 related to the potential for businesses to profit from contributions to private school voucher programs.

We appreciate the steps this Department has taken to curtail taxpayers' ability to profit on contributions to state tax credit programs that fund private school vouchers. Diverting tax dollars to pay private education expenses hinders the ability of public schools to provide the programs and resources necessary to meet the needs of all their students. There should be no opportunity to profit from contributions to such programs, which only increases the cost to the public.

Specifically, there is one aspect of the proposed regulation that could open the door to inappropriate tax avoidance opportunities for taxpayers who donate to certain school voucher programs. PFPS is concerned by the possibility that some owners of passthrough businesses may be able to circumvent the $10,000 State and Local Tax (SALT) deduction cap by recharacterizing the nondeductible portion of their state and local income tax payments as deductible business expenses.

Example 2 provided in 1.162-15(a)(2)(ii) states that a business partnership (P) may deduct a $1,000 payment to a charity as a business expense even if it “expects to receive a $1,000 income tax credit on account of P's payment, and . . . the credit can be passed through to P's partners.”

Putting aside the question of money spent on advertising, this example affords the business a $1,000 increase in their business expense deductions even though their “expense” was entirely offset by a state income tax credit. This outcome may not be problematic if the business's partners also see an offsetting decrease of $1,000 in their SALT deductions. But the example seems to leave open the possibility that these partners can increase their business expense deductions even in situations where their SALT deductions will remain unchanged because, both before and after the payment to the school voucher program, they will continue deducting the maximum allowable amount of state income tax ($10,000).

By redirecting a mandatory $1,000 payment away from their state government and toward a school voucher program instead, they have avoided the SALT cap limitation and have engaged in behavior that could prove profitable for the business based on the federal income tax consequences alone.

In other words, the language in this proposed regulation may embolden some businesses to attempt to circumvent the SALT deduction cap by donating to private school voucher programs because the regulation fails to adequately delineate between using a state income tax credit to offset taxes that would have been deducted for federal purposes, or using that credit to offset taxes that would have been nondeductible.

We ask that the IRS clarify that the SALT deduction cap cannot be circumvented for businesses that donate to private school voucher programs in this manner and defer to the comments submitted by the Institute on Taxation and Economic Policy for additional explanation of how this could be avoided.

Sincerely,

Jessica Levin
Director, Public Funds Public Schools
Senior Attorney, Education Law Center

---

January 29, 2020

Ms. Mon Lam
Attorney
Department of the Treasury
Internal Revenue Service
1111 Constitution Avenue N.W.
Washington, DC 20224

RE: IRS REG-107431-19

Dear Ms. Lam:

On behalf of AASA, The School Superintendents Association representing more than 13,000 school system leaders across the country, I write today to express our views on Regulation 107431-19.

We appreciate the steps this Department has taken to curtail taxpayers' ability to profit on contributions to state tax credit school voucher programs. However, I would like to express concern with one aspect of the proposed regulation that could open the door to inappropriate tax avoidance opportunities for taxpayers who donate to certain school voucher programs. I am concerned by the possibility that some owners of passthrough businesses may be able to circumvent the $10,000 State and Local Tax (SALT) deduction cap by recharacterizing the nondeductible portion of their state and local income tax payments as deductible business expenses.

Example 2 provided in 1.162-15(a)(2)(ii) states that a business partnership (P) may deduct a $1,000 payment to a charity as a business expense even if it “expects to receive a $1,000 income tax credit on account of P's payment, and . . . the credit can be passed through to P's partners.”

Putting aside the question of money spent on advertising, this example affords the business a $1,000 increase in their business expense deductions even though their “expense” was entirely offset by a state income tax credit. This outcome may not be problematic if the business's partners also see an offsetting decrease of $1,000 in their SALT deductions. But the example seems to leave open the possibility that these partners can increase their business expense deductions even in situations where their SALT deductions will remain unchanged because, both before and after the payment to the school voucher program, they will continue deducting the maximum allowable amount of state income tax ($10,000).

By redirecting a mandatory $1,000 payment away from their state government and toward a school voucher program instead, they have avoided the SALT cap limitation and have engaged in behavior that could prove profitable for the business based on the federal income tax consequences alone.

In other words, the language in this proposed regulation may embolden some businesses to attempt to circumvent the SALT deduction cap by donating to school voucher programs because it fails to adequately delineate between using a state income tax credit to offset taxes that would have been deducted for federal purposes, or using that credit to offset taxes that would have been nondeductible.

We ask that the IRS clarify that the SALT deduction cap cannot be circumvented for businesses that donate to school voucher programs in this manner and defer to the comments submitted by the Institute on Taxation and Economic Policy for additional explanation of how this could be avoided.

With appreciation,

Sasha Pudelski
Advocacy Director
The School Superintendents Association