Proposed Regulations on SALT Workaround Do Not Impact Deductions Under Other Provisions of the Law

In Information Letter INFO 2018-0030 the IRS has given limited additional information on the clarification the agency issued on September 5 regarding the state tax deduction workaround proposed regulations on August 23 (REG-112176-18).

The proposed regulations would require taxpayers to reduce charitable contribution deductions by the amounts of any state tax credits received for contributing if the credit exceeds 15% of the amount of the contribution.  In the later clarification, the IRS and Treasury stated that this regulation did not change the treatment of amounts paid that might be deductible under IRC §162(a) as an ordinary and necessary business expense.

This letter, issued to a taxpayer on September 18, expands that “no change” discussion to cover more situations than just items that could otherwise be treated as charitable deductions. 

The taxpayer asked specifically about the following types of programs:

This letter responds to your request for information, dated September 13, 2018, relating to amounts paid by business taxpayers pursuant to a state tax credit program in your state that provides credits against business taxes, such as insurance premium tax, direct pay sales and use tax, corporate income tax, alcoholic beverage excise tax, oil and/or gas production tax, and state sales tax due on rent or license fee payments.

The IRS issued an answer that reiterates that the proposed regulations only impact deductions claimed for charitable contributions under IRC §170:

The NPRM addresses whether certain amounts may be deducted as charitable contributions under § 170 (or § 642, if the payments are made by a trust or decedent's estate) and the regulations thereunder and does not propose to change existing tax treatment under any other provisions of the IRC or the Treasury Regulations. Thus, the NPRM does not impact a business taxpayer's payments made as part of your state's tax credit program described above that are deductible under a Code section other than § 170.