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Thursday, September 6, 2018
IRS will allow contributions to state and local tax credit programs as deductible business expenses
The Internal Revenue Service and the Treasury Department said Wednesday that payments under state or local tax credit programs may be deductible as business expenses, permitting a workaround for businesses to the $10,000 limit on state and local tax deductions in the Tax Cuts and Jobs Act.
However, the IRS and Treasury are still not giving individual taxpayers the ability to make charitable contributions to state-run funds as a way to circumvent the limits on the SALT deduction in the new tax law. Last month, they issued proposed regulations aimed at stopping blue states like New York, New Jersey and Connecticut that have authorized such funds, and other high-tax states that have been considering them (see IRS moves to block New York, New Jersey plans to bypass SALT deduction cap). But they left open the possibility of allowing business taxpayers to use them (see IRS short-circuits SALT deduction charitable workarounds to new tax law, but leaves others open for now). Connecticut started such a program earlier this year, and New York is considering one (see Some high-tax states aim to provide businesses workaround for SALT limits).
The IRS said Wednesday that 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, but it has to qualify as an ordinary and necessary business expense. In response to inquiries from taxpayers, the IRS clarified that the 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,” said the IRS. “Therefore, businesses generally can still deduct business-related payments in full as a business expense on their federal income tax return.”
The Treasury issued similar reassurance on Wednesday.
“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,” said Treasury Secretary Steven T. Mnuchin in a statement. “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.”
The clarification won't affect corporations, which aren't subject to the $10,000 limit on state and local tax deductions in the new tax law, but it would apply to pass-through entities such as partnerships.