The SCACPA Advocacy Team is taking this opportunity to share details from a letter that Chad Connelly, the Executive Director of the charity Exceptional SC, sent on Monday, April 29, to South Carolina CPAs who serve clients who for years have taken advantage of a state income tax credit that now clashes with federal tax law since the passage of the Tax Cuts and Jobs Act.

Connelly traveled to Washington, D.C., recently and spoke to a five-member panel that included the lead policy analyst of the Office of Regulatory Affairs and officials from the IRS and Office of Management and Budget. At issue is that the new federal law limits to $10,000 the SALT deduction filers can claim on federal returns. Connelly urged that programs such as Executive SC that existed before the passage of the TCJA “should be grandfathered in without penalty.”

A final decision on how the SALT regulations will be applied is anticipated in the coming weeks following a 45-day review period and will be posted on the regulatory information website Reginfo.gov.

To learn about the SC Department of Revenue’s recent advisory opinion on this topic and other charities affected, please read this SCACPA blog post: “Impacts on Charity Deductions, State Tax Credits are Focus of DOR Letter.”

Connelly was recently quoted in a CNBC story that examined how various states are preparing for the final review by the Office of Information and Regulatory Affairs on a final rule by the Treasury Department and the IRS that prohibits state workarounds to the federal law.

“I’m seeing some hesitation (in gift pledges) due to the lack of clarity from the IRS,” Connelly told CNBC. “Compared to last year, I would say it’s a slower pace.”

Connelly also wrote about other updates that could be on the horizon for Exceptional SC:

  • The SC House has approved legislation to expand the cap on donations to the group to $20 million, and now debate has moved to the Senate. Exceptional SC has asked for a year-to-year “carryover” provision on the tax credits and that the tax liability be raised from 60% to 100%.
  • Exceptional SC continues its plans to pivot to the business tax credit promotion model seen in other states. That could lead to a student program capacity of $30 million to $50 million in the future, with funding primarily coming from corporate donations. Georgia, Florida and Arizona see hundreds of millions of dollars annually in re-directed corporate tax dollars go to fund scholarships.

Below is Connelly’s letter in its entirety:

Subject: An Update on SALT and IRS regulations

Thank you for all that you’ve done to help us promote Exceptional SC and the tax credit scholarships that have helped us fund over 2,600 exceptional needs students across South Carolina over the past few years.

My Meeting with the OMB & IRS

Our Board and leadership are well aware of the transition the IRS SALT regulation changes have created with our program and others like it across the nation. At their behest, I met with officials from the Office of Management and Budget and IRS in Washington week before last to present our case for modification to SALT regulations.

The five-member panel included the lead Policy Analyst of the Office of Information and Regulatory Affairs who will make the final decision on how this new rule is applied.

“How would you fix the damage this new regulation has done?”

Their main question was simply “How would you fix the damage this new regulation has done?” I replied, “Clearly, this new regulation was written for the states who recently created their own tax avoidance schemes to avoid President Trump’s tax reform and the unintended consequence was penalizing organizations and programs that were in place well before tax reform was written; therefore, existing programs should be grandfathered in without penalty.” There were definitely nods in the room.

While they could not reveal any position they might take with this policy, they did indicate that this issue had received much attention. We were told to anticipate their final ruling in the coming weeks following their 45-day review period. We expect their decision to be posted on Reginfo.gov in the coming weeks.

I have also done several interviews with various financial media organizations that I’d like to share with you.

Additional sources: “Federal tax breaks for donating to these state-run funds are on shaky ground”
“IRS targeting loophole that allows SC special-needs donors to earn money in tax savings”

The Benefit Is Still There

No matter what happens, we are convinced that we have a terrific program that at the very least, gives a dollar-for-dollar tax credit on individual and business state income tax liability as well as federal tax advantages for businesses.

Additional sources: https://www.youtube.com/watch?v=GARsZjKUGhE

Expansion on the Horizon?

We are thankful for the favor we’ve gained with the legislature. The SC House has already approved legislation to expand the cap to $20 million. While we don’t know what the Senate will do or when they might act, we have also asked for a “carryover” provision from year to year on the tax credits as well as a change from 60% of the tax liability to 100%.

A Benefit for Your Business Clients

Finally, we have planned for some time to pivot to a business tax credit promotion model like most of the other states use. We believe that we will have a student program capacity of some $30-$50 million in the coming years, with funding primarily coming from corporate donations like we see in Georgia, Florida, and Arizona where hundreds of millions in re-directed corporate tax dollars fund scholarships each year.

We’ll keep you informed on our progress in all of this. We are prayerful that you will continue to support and promote our program and to push out the email updates we send to you and to potential donors. If you have clients who would be interested in donating, please visit www.ExceptionalSC.org.

Thanks & have a great week,

Chad Connelly

Executive Director, Exceptional SC

chad@exceptionalsc.org