The IRS has issued final regulations that address the question of whether a state or local tax credit should be treated as a return benefit, or quid pro quo, when received in return for making a charitable contribution. Under Reg § 1.170A-1(h)(3), the amount of a taxpayer’s charitable contribution deduction under section 170(a) is reduced by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer’s payment or transfer. An exception applies for taxpayers when the state and local tax credits received or expected to be received is 15 percent or less of the taxpayer’s payment or fair market value of the property transferred.

The new regulation also addresses whether state or local tax deductions received in return for making a charitable contribution should be treated as a return benefit. Unlike tax credits, however, state or local tax