Companies and their employees are looking for ways to support charitable relief efforts for those impacted by Hurricane and Tropical Storms Harvey and Irma. Similar to the tax relief designed to support charitable efforts in the aftermath of Hurricanes Katrina, Sandy, and Matthew and the 2014 West African Ebola Outbreak, the IRS has suspended the application of tax rules that might otherwise limit employer and employee charitable contributions in Notices 2017-48 (available here) and 2017-52 (available here) for donations made before January 1, 2019.
Ordinarily, employees would be subject to income tax and employees and employers would be subject to employment taxes (social security and Medicare) on the value of leave converted to cash, and an employer’s charitable deduction for cash donated is limited under Code §170.
The current relief offered by the IRS for a properly constructed employer sponsored charitable leave donation program:
- eliminates taxable income to the employee
- eliminates employment tax for the employee and the employer
- allows the employer to deduct the full amount of any donated cash as an ordinary business expense under Code § 162 (The employee does not get a charitable deduction)
While the benefits are enticing for employers and employees, here are some issues that merit careful thought:
- Employees may appropriately ask for a say in the choice of charity and employers should ensure that a chosen charity qualifies. Employers should consider the impact of adopting and promoting a charitable leave donation program on other company charitable initiatives, including the degree to which a leave program might draw participation away from other established causes.
- Employers who do not typically pay out accumulated leave should consider whether converting banked leave to cash adversely impacts cash flow and budgets. Employers who pay out accumulated leave may benefit from the employment tax savings, but should consider how a reduction in employees’ taxable income impacts other benefit programs. In addition, charitable leave donation programs have different requirements than those for leave programs allowing employees to donate leave for fellow employees.
- Arizona’s recent Proposition 206 regulates the provision of paid time off for sick leave. Care should be taken to ensure that the donation of that leave to charitable causes does not run afoul the policy behind Prop. 206.
If you are thinking about a leave donation program as a way to support the pressing and continuing need for charitable relief efforts, we encourage you to talk with legal counsel. We have a full service team to help you achieve the optimal result for you and your employees who can advise about the charitable implications, Cindy Shupe who can advise about the tax and employee benefits implications, and Jessica Post who can advise about the Prop. 206 implications.