IRS Announces Tax Relief for Leave Donations to Aid Victims of Hurricane Michael

The IRS has announced special tax relief for leave-based donation programs set up by employers to aid victims of Hurricane Michael. Under a leave-based donation program, an employer may permit its employees to give up their vacation, sick, or personal leave in exchange for cash payments by the employer to charitable organizations. Ordinarily, leave-based charitable donations must be included in the donating employee’s income. In addition, the opportunity to elect such contributions usually raises the concern that eligible employees might be taxed on income that could have been donated because the ability to make a donation triggers “constructive receipt.”

This guidance addresses both tax issues. First, cash payments that employers make to qualified tax-exempt organizations (as described in Code § 170(c)) in exchange for vacation, sick, or personal leave that their employees elect to forgo will not constitute income to the employees if the payments are made before January 1, 2020, for the relief of victims of Hurricane Michael. Such payments need not be included in Box 1, 3, or 5 of the employee’s Form W-2. Second, the mere opportunity to make a leave donation will not result in constructive receipt of income for employees. Electing employees may not deduct the value of the donated leave on their income tax returns—such deductions would result in “double-dipping” because the donated leave will already have been excluded from their income. Employers will be permitted to deduct the contributions as trade or business expenses without regard to the charitable contribution restrictions under Code § 170.

EBIA Comment: Tax relief for leave-donations was once rare, but in recent years, it has become more common and standardized. The IRS issued similar relief four times last year: for Hurricanes Harvey (see our Checkpoint article), Irma (see our Checkpoint article), and Maria (see our Checkpoint article), and for the 2017 California wildfires (see our Checkpoint article). This is the first such guidance for 2018, but given the devastation caused by California’s 2018 wildfires, this may not be the last. For more information, see EBIA’s Fringe Benefits manual at Sections XXII.E (“Leave-Sharing and Other Donation Programs”) and XXII.B.2 (“Tax Trap: Giving Employees the Choice to Cash Out Vacation/PTO Days Can Create Tax Problems”). See also EBIA’s Cafeteria Plans manual at Sections III.B (“The Constructive Receipt Doctrine and the Code § 125 Safe Harbor”) and III.G (“Constructive Receipt and Cash-Out of Unused Vacation Days”).

Contributing Editors: EBIA Staff.