Proposed Regulations on SALT Workaround and State Tax Credit Programs
Oregon is one of 33 states that have state tax credit programs that may be affected by the Treasury/IRS
announced August 27. This came up on NAO's most recent Member Webinar, so we want to provide you with an overview of the issues presented, share some resources, and keep the conversation going about what NAO and other state associations are doing to address the issues and your concerns.
Key Points to Remember
- The proposed rules only matter to people who itemize their deductions. Standard deduction takers are not affected.
- The proposed rules are just that: proposed, as in draft or suggested. These proposed rules could change.
- The Chair of the House Ways and Means Committee, Kevin Brady (R-TX), said, "...Treasury is clearly seeking to preserve important state tax credit programs that were in place before tax reform that are genuinely designed to serve local charities, many of them educational." What he and his committee are after by suggesting these new regulations are the SALT workarounds created in CN, NJ and NY states.
The proposed regulations, if ultimately adopted after a 45-day public comment period and regulatory review process, would require taxpayers to treat the value of tax credits like other benefits received when making a charitable donation, such as subtracting the value or cost of a meal at a charity gala from the charitable deduction. The proposed rules do not make a distinction between government-run nonprofits and public charities; donations to either that generate tax credits would have to be reduced by the value of the credit. This would be a change from prior law that permitted full deduction of charitable donations that also allowed taxpayers to apply a tax credit based on that donation to reduce state taxes. The draft rules exempt as "de minimis" state tax credits valued at 15 percent or less, and expressly do not apply to dollar-for-dollar state tax deductions, as opposed to credits.
Through our national network partner, the
National Council of Nonprofits
, and other state associations, we know of
33 states and the District of Columbia
that have tax credit programs that could be affected by the proposed rule including Oregon. Also affected are the SALT workaround programs enacted this year in CT, NJ, and NY where they set up "state charities" to allow state tax payers to "donate" a portion of their taxes there and be able to take that as a federal tax deduction.
What Programs are Affected?
There are at least eleven different types of state tax credit programs that we and our colleagues have identified from the available information. They are: Affordable Housing; Charitable Organizations; Conservation/Preservation; Cultural Development/Cultural Trusts; Economic Development; Education/Scholarships; Endowments; Foodbanks; Historic Preservation; SALT Workaround; and Schools.
The value of the existing credits ranges from a low of 10 percent (which is under the
de minimis cap) to 100 percent.
One Example: Tax Credit Scholarship Programs
Government Accountability Office
issued a report finding that state tax credit scholarship programs collectively awarded scholarships totaling more than $856 million. According to GAO, in 2018, there were 22 tax credit scholarship (TCS) programs authorized across 18 states, which provide state tax credits for individual and business donations that fund scholarships for students to attend elementary and secondary private schools (see figure). The report found that half of the 22 programs available in 18 states at the start of this year allow donors to claim 100 percent of their donations as state tax credits, while the other 11 offer tax credits of 50 percent to 85 percent of donations. In addition, 16 programs limit donation amounts and four have thresholds based on donors' financial circumstances.
highlights this example of why the programs are open to criticism:
"In one example, a taxpayer who gave $1,000 to a state scholarship program with a 100 percent tax credit would get a $1,000 state tax reduction. Assuming the taxpayer had a 32 percent federal tax rate and itemized deductions, his or her federal liability would be cut by $320, meaning the $1,000 donation would have yielded a $1,320 tax cut."
Make Your Voice Heard - Give Feedback on These Regulations
The IRS is accepting comments on the regulations through October 11, 2018. You can read the regulation and submit a comment via regulations.gov
Comment on the regulations.
Protecting Nonprofit Nonpartisanship Johnson Amendment at Greatest Risk
Hot off the press - an update on the Johnson Amendment: On September 27, the U.S. House-Senate conference committee that would make the decision to keep, reject, or revise the harmful provision in the House bill that would undermine the Johnson Amendment did not take action. This means that we will have to wait for a closeout in the lame-duck session of Congress after the November elections. The Johnson Amendment is the provision of federal tax law that protects charitable nonprofits, houses of worship, and foundations from demands from politicians and others for endorsements and other support. At issue is controversial language that would effectively block the IRS from enforcing the Johnson Amendment when "churches" violate it in even the most egregious ways, such as diverting charitable assets to influence partisan political campaigns.
NAO will continue to push out alerts and information on changes in federal and state laws and regulations that impact your nonprofit. Please support our work by renewing or becoming a member today!