Payments to Charities

Final regulations from the Treasury Department were published and made effective on Tuesday, August 11, 2020, regarding the treatment of payments (not charitable contributions) to charitable entities in return for consideration (value). The regulations finalize proposed regulations issued in December 2019 and incorporate previously published IRS guidance.

For a taxpayer to get an allowable deduction as a trade or business expense when making a payment to a charity is no surprise and simply clarifies the previous regulation.

A payment or transfer to or for the use of an entity described in section 170(c) that bears a direct relationship to the taxpayer’s trade or business and that is made with a reasonable expectation of financial return commensurate with the amount of the payment or transfer may constitute an allowable deduction as a trade or business expense rather than a charitable contribution deduction under section 170.

Treas. Reg. § 1.162-15(a)

The regulations also make clear that for quid pro quo contributions (i.e., part charitable contribution, part payment for consideration), the quid pro quo characterization applies if the taxpayer receives or expects to receive goods or services in return, regardless of whether it is from the charitable entity or from any other party.

But the real interest in this regulation (particularly before it was first proposed) was related to how a taxpayer’s payment (not a charitable contribution) to a charity would be treated. Some context may be helpful in understanding the issue.

In response to the Tax Cuts and Jobs Act (TCJA) caps on the deduction for aggregated state and local tax (SALT) (generally, $10,000), some state and local governments created SALT credit programs under which taxpayers who contribute to IRC Section 170(c) entities (charities) created and promoted by state and local governments received a corresponding tax credit against their respective SALT liabilities in return. The IRS and Treasury responded with guidance and regulations providing that such credit against SALT liabilities would constitute a return benefit. Accordingly, a taxpayer cannot include such amounts as a deductible charitable contribution under federal tax laws. But could they be deductible under some other section of the Internal Revenue Code (IRC)?

The final regulations include safe harbors applicable to payments made to a charitable entity for which the payor receives or expects to receive a State or local tax credit (“SLTC contributions”).

Business Entities (including C corporations)

For certain business entities, the portion of an SLTC contribution equal to the amount of the state or local tax credit received or expected to be received (the “SLTC amount”) is recognized as an ordinary and necessary business expense, deductible pursuant to IRC §162. This safe harbor applies only to payments of cash and cash equivalents.


For individuals, the SLTC amount is recognized as as a payment of State or local tax, deductible pursuant to IRC §164.

Additional Resources

Final regs. issued on payments to charitable organizations (Journal of Accountancy)