In Notice 2017-48, released on September 5, 2017, the IRS announced that employees who donate vacation, sick, or personal leave in exchange for employer contributions to charitable organizations providing relief to victims of Hurricane/Tropical Storm Harvey will not be taxed on the value of that times as income. Also, employers may deduct the amounts so donated as business expenses.
This Notice is important because it represents a suspension of the normal constructive receipt rules of taxation. Ordinarily, when an employee earns income and has the right to receive such income, he or she is subject to tax on it, even if the employee instructs the employer to give the money, instead, to some other person. The IRS has provided such suspension of the rules before, such as in the cases of Hurricane Sandy (Notice 2012-69) and Hurricane Matthew (Notice 2016-69).
The IRS has now advised it will not assert the constructive receipt doctrine over such leave donations and associated payments so long as the payments are:
- Paid to Code Section 170(c) charitable organizations. These are, generally, the organizations often referred to under Section 501(c)(3) of the Code;
- For the relief of Hurricane Harvey victims; and
- Paid to such organizations before January 1, 2019.
Employees who participate in a leave sharing program, sometimes called a leave “bank,” where the foregone leave is excluded from compensation for tax purposes, will not be able to claim a charitable deduction for contribution of value from such a bank.
As for employers, the IRS states in the Notice that it will allow them to treat donations from leave sharing programs as business expense under Section 162 of the Code rather than as charitable contributions under Section 170. This will allow employers donating value from leave banks to deduct that value without being subject to the several limitations on charitable contributions under Section 170.
The record keeping and reporting rules are also amended in this circumstance. Amounts representing leave sharing donations need not be included in Box 1 (wages, tips, other compensation), Box 3 (Social Security wages, as applicable), or Box 5 (Medicare wages and tips) of Form W-2.
In short, these amounts will be free from income and payroll tax withholding.
This Notice provides relief for both itemizing and non-itemizing taxpayers. A non-itemizing taxpayer who donates $2,000 worth of leave time would be able to take a deduction for $2,000. The same taxpayer would not receive the same tax benefit if he or she had taken the leave and contributed $2,000 in cash to the charity. As well, the reduction in AGI through application of the Notice provisions can make it possible for a participating employee to access a greater tax benefit among the various deductions and credits which decrease as AGI goes up. For example, a participant might be able to take a larger deduction for a contribution to a traditional IRA. On the other hand, participation in donation of leave time could yield a lower retirement plan contribution, if the employer’s plan defines wages to include the donated level and character of donated leave.
This memo is intended only as an illustration of general principles and is not legal or tax advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action. In some jurisdictions, this memo may be attorney advertising.