In a Notice and accompanying news release, IRS has announced that employees won’t be taxed when they forgo vacation, sick, or personal leave in exchange for employer contributions of amounts to charitable organizations providing relief to Hurricane Harvey and Tropical Storm Harvey (collectively, Hurricane Harvey) victims, and employers may deduct the amounts as business expenses.
Leave-based donations. Some employers have set up or may be considering setting up programs where employees can donate their vacation, sick or personal leave in exchange for the employer making cash payments to qualified tax-exempt organizations that provide relief for the victims of Hurricane Harvey.
Hurricane Harvey relief. In Notice 2017-48, IRS has announced that it will not assert that cash payments an employer makes to Code Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo, constitute gross income or wages of the employees, if the payments are:
- Made to the Code Sec. 170(c) organizations for the relief of Hurricane Harvey victims; and
- Paid to the Code Sec. 170(c) organizations before Jan. 1, 2019.
Nor will giving employees the choice to participate cause them to be considered in constructive receipt of income. However, employees who participate in a leave-sharing donation program won’t be allowed to claim a charitable contribution deduction for the value of forgone leave excluded from compensation and wages.
As for employers, IRS won’t assert that payments made under a leave-sharing donation program are deductible as charitable contributions under Code Sec. 170, rather than deductible as business expenses under Code Sec. 162.
Observation: Thus, the employer will be able to deduct the payments without being subject to the various charitable contribution limits that apply under Code Sec. 170.
Treatment of Form W-2. Amounts representing leave-sharing donations need not be included in Box 1 (wages, tips, or other compensation), Box 3 (Social Security wages, if applicable), or Box 5 (Medicare wages and tips) of Form W-2.
Observation: In other words, these amounts also will be free of income- and payroll-tax withholding.
Observation: Participation in these programs can help both employees who itemize and those who don’t. For example, a non-itemizer who forgoes $2,000 worth of leave will get the equivalent of a $2,000 deduction that would not be available if he or she took the leave and contributed $2,000 in cash. And, the lower adjusted gross income (AGI) from participating in the program may make it possible for the employee to achieve a greater tax benefit from any of the numerous deductions and credits that are reduced as AGI increases. For example, participation may yield a higher deduction for a contribution to a traditional IRA. Itemizers can also benefit from the lower AGI. Both itemizers and non-itemizers can save Social Security taxes on the amount forgone. On the downside, participation could result in smaller retirement plan contributions depending on how compensation is defined under the employer’s retirement plan.
For more information on this issue and other employer tax issues, contact Scott Rogers.