IRS Provides for Potential Workaround for Anti-SALT Workaround Proposed Regulations

In what can be called an “interesting” news release (IR-2018-178), the IRS clarified that the proposed regulations that dealt with a required reduction of charitable contributions for state tax credits will not impact deductions claimed for business related payments to charities.

The IRS notice itself is short and not terribly detailed:

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.

Updates on the implementation of the Tax Cuts and Jobs Act (TCJA) can be found on the Tax Reform page of

However, Treasury Secretary Mnuchin provided a clearer statement regarding the reason for this release:

The IRS clarification makes clear that the longstanding rule allowing businesses to deduct payments to charities as business expenses remains unchanged under the Tax Cuts and Jobs Act. The recent proposed rule concerning the cap on state and local tax deductions has no impact on federal tax benefits for business-related donations to school choice programs.[1]

Of course, this reference to a “longstanding rule” has sent many running to uncover just what such a rule is.  Much of the guidance that exists arose prior to the Tax Reform Act of 1986 when a much larger proportion of small businesses were closely-held C corporations.

The concept is that the expenditure is treated not as a charitable contribution under IRC §170, but rather an ordinary and necessary business expense under §162.  A series of Revenue Rulings from the 1970s help illustrate the nature of such a business purpose.

Reg. §1.170A-1(c)(5) contains the general rules for treating an expenditure as a business expense rather than as an itemized deduction:

(5) Transfers of property to an organization described in section 170(c) which bear a direct relationship to the taxpayer's trade or business and which are made with a reasonable expectation of financial return commensurate with the amount of the transfer may constitute allowable deductions as trade or business expenses rather than as charitable contributions. See section 162 and the regulations thereunder.

Taxpayers taking this position, as noted by the regulation provision above, must show two things:

  • The expenditure is directly related to the taxpayer’s trade or business and
  • The expenditure is made with a reasonable expectation of financial return that is reasonably linked to the payment made.

A Tax Adviser article from August of 1995[2], archived at The Free Library, lists a series of citations to rulings and cases where a business link was found.  In each case the two tests cited above were met.

The listed cases and rulings from that article are reproduced below:

  • Bargain sales of sewing machines by a sewing machine manufacturer to churches, schools and other charitable entities, in order to encourage training in the use of sewing machines and enlarge its future market (Singer Co., Ct. Cl., 1971).
  • Payments by a travel agency to charitable organization clients when the payments were based on the amount, character and profitability of the business received and expected to be received (Marquis, 49 TC 695 (1968), acq. 1971-2 CB 3).
  • Payments by a corporation to a charitable organization for cooperation and the use of its name in connection with the corporation's advertising program. Under the arrangement, the corporation paid the charity a specified amount on each unit of the corporation's product for which the purchaser mailed a label to the charity (Rev. Rul. 63-73).
  • Payments made by the operator of parimutuel racetracks to local charities of profits earned on certain charity days, when the charity days were run to facilitate a favorable vote from the citizens in the area to enable the taxpayer to retain its racing license (Rev. Rul. 77-124; cf. Rev. Rul. 72-542).
  • Payments by a stock brokerage business to a charitable organization equal to 6% of brokerage commissions received from the charitable organization, when the taxpayer advertised that it was making the payments to enable the charitable organization to reduce neighborhood tensions and combat community deterioration in the area in which the taxpayer's office was located. The taxpayer believed this advertised policy would promote new business and enable it to retain existing business (Rev. Rul. 72-314).
  • Payments by a retail business in a resort city to a governmental oil pollution control fund used for research, beautification and advertising, in order to help recover tourist business lost due to oil pollution (Rev. Rul. 73-113).
  • Payments by an employer corporation to a tax-exempt union educational and cultural charitable trust, when the payments were required pursuant to a collective bargaining agreement (Rev. Rul. 74-51).
  • Contributions to a tax-exempt dance company in financial difficulty, when the taxpayer derived substantial income from performing services for the dance company (Letter Ruling 9045015).
  • Payments by a supermarket business of 1% of its sales to various civic organizations, churches, government entities and charities located in the communities where stores were located, pursuant to a program of advertising the donation program in newspapers and on radio and television. The charities were required to agree to the use of the charity's name in connection with the advertising (Letter Ruling 9309006).

One item of interest to note in the above list is that Rev. Rul. 77-124 was issued to distinguish the situation found in Rev. Rul. 72-542.  In that ruling, the facts were as follows:

The taxpayer is a corporation engaged in the business of operating a pari-mutuel race track. The corporation is licensed, regulated, and supervised by the Racing Commission of the state where the track is operated. The corporation is licensed to operate the track is a predetermined number of days, but elected under regulations of the Racing Commission to operate the track one additional day only for purposes of charity. Under such regulations, the corporation's election requires it to contribute all of the gross amount of that portion of gross receipts of all pari-mutuel wagers retained by it (i.e., a certain percentage of the pari-mutuel wagers less the state's tax thereon) from such charity day racing, to a charitable corporation, trust, fund or foundation. A foundation was formed by the corporation that qualifies as an organization described in section 170(c)(2) of the Internal Revenue Code of 1954. The taxpayer's portion of the pari-mutuel wagers from charity day racing was distributed to the foundation. There was no expectation of an economic return commensurate with the amount distributed.

There is no written or verbal lease between the taxpayer and the foundation concerning the use of the track facilities during charity day, and the provisions of the general insurance policy issued to the taxpayer provides public liability coverage on charity day. Advertising and promotional activities for charity day are provided by the taxpayer.

The ruling first holds that the amounts received are income to the business under IRC §61.

In the instant case, the taxpayer and not the foundation is the promoter of charity day since only the taxpayer is licensed by the state to operate a pari-mutuel race track. Under the state's regulations, the taxpayer could operate the track an additional day over the predetermined number of days allotted to it only if the taxpayer contributes its portion of the pari-mutuel wagers to a charitable organization. The taxpayer is not an agent for the foundation and is in effect assigning to the foundation earnings derived by it from the operation of the charity day racing.

Accordingly, that portion of gross receipts of all pari-mutuel wagers retained by the taxpayer on charity day racing and subsequently distributed to the charitable foundation is income to the taxpayer within the meaning of section 61 of the Code.

However, the real question is what happens to the payment to the charity.  In this case the IRS finds the payment does not meet the two tests cited earlier.

If a taxpayer makes a transfer of property to a charitable organization with a reasonable expectation of an economic return to himself in his trade or business, commensurate with the amount of the transfer, no deduction under section 170 of the Code is allowable with respect to such transfer and the transfer may constitute an ordinary and necessary business expense under section 162 of the Code. See Revenue Ruling 72-314, C.B. 1972-1, 44: Conversely, if a taxpayer makes a voluntary transfer of property to a charitable organization without expectation of a commensurate economic return to him in his trade or business, the deductibility of the transfer is determined under section 170 of the Code, and no deduction under section 162 of the Code is allowable with respect to such transfer.

Whether a particular transfer was made with a reasonable expectation of an economic return commensurate with the amount of the transfer is a question of fact. In the instant case, the taxpayer did not expect a commensurate economic return from the amount distributed to the foundation.

Accordingly, the amount of pari-mutuel wagers retained by the taxpayer on charity day racing and distributed to the charitable foundation is not deductible as an ordinary and necessary business expense by the taxpayer under section 162(a) of the Code. However, such amount is deductible as a charitable contribution under section 170 of the Code, subject to the conditions and limitations contained in section 170 of the Code.

Presumably if there was a state credit available in this situation for the transfer to the charity, the charitable contribution deduction would have to be reduced by the amount of the credit.

Conversely, the Secretary’s statement implies (though never explicitly states) that no such reduction would be necessary for a credit against state taxes for a transfer in the list of situations cited in the 1995 Tax Adviser article.  A Wall Street Journal article describing the release did indicate that this would be the result.  As the article states:

But owners of partnerships and other businesses whose owners pay their business income taxes through their individual returns are subject to the $10,000 cap. By using the state tax-credit programs and the clarification issued on Wednesday, they could essentially turn nondeductible state taxes into deductible business expenses.[3]

Of course, if this reading is correct that brings up another question--would the states that were initially the target of the proposed regulations be able to modify their programs to create such a business deduction case?  That could be especially true for programs in high tax states based on pre-existing programs, such as the one in Oregon for college scholarship systems or, assuming it is signed into law, a similar program that passed the state legislature in California that would increase the college access credit from 50% to 75% of the amount of donation.


[1] Treasury Secretary Mnuchin Statement on Clarification for Business Taxpayers: Contributions Under State and Local Tax Credit Programs Generally Deductible as Business Expenses, U.S. Department of Treasury website,, September 5, 2018

[2] Harrison, Robert E., “Payments to charities by business enterprises: Sec. 162 vs. Sec. 170..” The Free Library, Retrieved Sep 05 2018 from

[3] Richard Rubin, “IRS Clarification Eases Deduction Limits for Some Business Owners,” Wall Street Journal website,, September 5, 2018