IRS Ignores Scholarship Program Pleas for SALT Relief

Final IRS rules offering businesses relief following the imposition of a $10,000 cap on state and local deductions don’t go as far as some nonprofits had hoped.

The rules (T.D. 9907), released Friday, ignored comments about how 2019 rules (T.D. 9864) taking aim at SALT workarounds could lead to a decrease in donations to state-run scholarship organizations. Scholarship funds had asked the IRS to help ease that pain.

The Friday rules focus on business relief. They say C corporations or some pass-through businesses that receive a state tax credit in exchange for donating to a charitable fund can deduct those costs from their federal tax return.

The IRS said it received more than 40 comments on the rules, but largely adopted the final version.

“The Treasury Department and the IRS recognize the importance of the federal charitable contribution deduction, as well as State and local tax credit programs, in encouraging charitable giving. However, the concerns expressed by these commenters relate more directly to the 2019 final regulations,” the rules said.

Bruce Ely, chair of the state and local practice team at Bradley Arant Boult Cummings LLP, said he had hoped the rules would “grandfather” organizations that had been in place before the 2019 rules were released.

“It’s a bit of bad news but not surprising,” he said Monday.

‘A Sledgehammer’

The 2017 tax law capped state and local tax deductions at $10,000, a change that has rankled lawmakers in high-tax states and led to some states, such as Connecticut, to find a way around the limit. The 2019 rules prohibited state efforts that would allow residents to create charitable funds and get a state tax credit in exchange.

Groups have requested relief since, warning the workaround rules could hurt state-run scholarship programs.

The Association of Christian Schools International, for example, asked the IRS to createexceptions for some charities with no affiliations to government entities.

Jamison Coppola, legislative director at the American Association of Christian Schools, which promotes developing Christian education in America, said it’s disappointing that Treasury didn’t accept comments that asked for exceptions for funds that existed before the 2017 tax law.

“I would characterize their answers to our concerns as a weakly pragmatic ‘end justifies the means’ defense,” said Coppola, who spoke at a hearing on the rules in February.

Leslie Hiner, vice president of legal affairs at EdChoice Inc., who also spoke at the hearing, said that final rules will help some donors.

Still, SALT workaround guidance “continues to be a sledgehammer used to fix a problem limited to highly taxed individuals in high-tax states rather than a rational rule that recognizes the legitimate reliance States and donors place on long-standing tax law related to charitable giving,” Hiner said in an email.