SECTION 4. SAFE HARBOR FOR

SPECIFIED PASSTHROUGH ENTITIES

.01 Scope . The safe harbor provided by this section 4 applies to a specified passthrough entity described in section 4.02 of this revenue procedure that makes payments described in section 4.03 of this revenue procedure in carrying on its trade or business.

.02 Specified passthrough entity . An entity will be considered a specified passthrough entity described in this section 4.02 only if each of the requirements

set forth in section 4.02(1) through (4) is satisfied.

(1) The entity is a business entity other than a C corporation that is regarded for all federal income tax purposes as separate from its owners under section 301.7701–3; (2) The entity operates a trade or business within the meaning of section 162;

(3) The entity is subject to a state or local tax incurred in carrying on its trade or business that is imposed directly on the entity; and

(4) In return for a payment to an organization described in section 170(c), the entity receives or expects to receive a state or local tax credit that the entity applies or expects to apply to offset a state or local tax described in section 4.02(3) of this revenue procedure other than a state or local income tax.

.03 Safe harbor . If a specified passthrough entity described in section 4.02 of this revenue procedure makes a payment to or for the use of an organization described in section 170(c) and receives or expects to receive a tax credit described in section 4.02(4) of this revenue procedure that the entity applies or expects to apply to offset a state or local tax described in section 4.02(3) of this revenue procedure other than a state or local income tax, the specified passthrough entity may treat such payment as meeting the requirements of an ordinary and necessary business expense for purposes of section 162(a) to the extent of the credit received or expected to be received.

.04 Examples . (1) Example 1 . P is a limited liability company (LLC) classified as a partnership for federal income tax purposes under section 301.7701–3 and is owned by individuals A and B. P is engaged in a trade or business within the meaning of section 162 and makes a payment of $1,000 to an organization described in section 170(c). In return for the payment, P receives or expects to receive a dollar-for-dollar state tax credit to be applied to P’s state excise tax liability incurred by P in carrying on its trade or business. Under applicable state law, the state’s excise tax is imposed at the entity level (not the owner level). Under section 4 of this revenue procedure, P may treat the $1,000 payment as meeting the requirements of an ordinary and necessary business expense under section 162.

(2) Example 2 . S is an S corporation engaged in a trade or business and is owned by individuals C and D. S makes a payment of $1,000 to an organization described in section 170(c). In return for the payment, S receives or expects to receive a state tax credit equal to 80 percent of the amount of this

January 22, 2019 402 Bulletin No. 2019–04

payment ($800) to be applied to S’s local real property tax liability incurred by S in carrying on its trade or business. Under applicable state and local law, the real property tax is imposed at the entity level (not the owner level). Under section 4 of this revenue procedure, S may treat $800 of the payment as meeting the requirements of an ordinary and necessary business expense under section 162. The treatment of the remaining $200 will depend upon the facts and circumstances and is not affected by this revenue procedure.