New IRS Rules Change Corporate Deductions

By Elizabeth Schwinn

The IRS has issued new regulations designed to make it easier for U.S. multinational companies to take deductions for their charitable contributions. The rules took effect as soon as they were issued last week, but the government said it might make changes if it hears complaints from businesses, charities, or others.

At issue is how U.S. companies that do business overseas and donate to charities may deduct their gifts.

Some companies that operate in the United States and abroad prefer to charge their charitable deductions against their U.S. income because of tax benefits. But federal tax law has required them to apply part of their deductions against their foreign income. Under the new rules, which took effect July 28, multinational U.S. companies must apply their charitable deductions to their U.S. income only.

“By adopting the straightforward approach of allocating contributions that are deductible for U.S. tax purposes to U.S.-source income, the regulations ensure that the incentives for charitable contributions work as intended,” Greg Jenner, the Treasury Department’s acting assistant secretary for tax policy, said in a statement.

Many charities are breathing a sigh of relief over the new rules. In 1991, the IRS proposed regulations that would have forced multinational companies to allocate their deductions to their income from foreign sources if they were aware that the money would be used outside the United States.

The government received hundreds of comments from charities that argued that the proposal would result in fewer corporate gifts to their international programs. The reason: The rule would require multinational companies that wanted to take a charitable deduction against U.S. income to donate only to charity programs operating inside the United States. With its new rules, the IRS has officially backed off its 13-year-old proposal.

The proposed rules were published in the July 28 issue of the Federal Register. They can be found online at http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.
access.gpo.gov/2004/04-17079.htm.