June 19, 2019
Authored by: Joel Ocampo
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 deductions are not treated as a return benefit for the taxpayer unless the value of the deductions exceeds the value of the taxpayer’s charitable contribution.
Prior to these new regulations, the Treasury Department and the IRS did not publish formal guidance on the issue. In 2010, the IRS Chief Counsel advised that, under certain circumstances, the value of a credit received in return of a charitable contribution did not have to subtract from a taxpayer’s charitable contributions deduction. In June of 2018, however, the Treasury Department and the IRS questioned the position of the Chief Counsel and announced their intention to propose regulations addressing the issue. Reg. § 1.170A-1(h)(3) is effective August 12, 2019.