Last week, the Treasury and IRS announced final regulations limiting the effectiveness of certain State and Local Tax (“SALT”) cap workarounds.
Following the December 2017 enactment of the Tax Cuts and Jobs Act (“TCJA”), which limited individuals’ itemized deductions for state and local taxes to $10,000 ($5,000 for married persons filing separately), taxpayers sought to work around the cap by making ostensibly charitable contributions in exchange for certain state tax credits. Prior final regulations, published in June 2019, made clear that such quid pro quo transfers reduce the amount of the taxpayers’ charitable contribution deductions. Subsequently, the government issued proposed regulations addressing certain related issues, clarifying that:
- Business taxpayers’ contributions may constitute allowable trade or business expense deductions rather than charitable contribution deductions
- Individuals whose charitable contribution deductions had to be reduced as quid pro quo transfers could treat such transfers as payments of state and local taxes (the deductibility of which, however, remains subject to the SALT cap)
The final regulations, which are to be published on August 11, 2020, essentially adopt the proposed regulations.
Contact your Friedman advisor with any questions concerning these regulations and their impact on your SALT obligations.