September 12, 2017
The entire Country watched as Hurricane Harvey, a category 4 hurricane, invaded Texas on August 25, 2017. Harvey displaced millions of Texans with 130 mph winds, torrential rains, and catastrophic flooding, and also affected many parts of Louisiana, Mississippi, Tennessee, and Kentucky. Hundreds of thousands of homes, businesses, and vehicles, have been damaged or destroyed in the wake of Harvey, the death toll exceeds 60, and as officials further uncover the destruction these numbers are expected to only climb. The devastation is unprecedented and the damage from the storm is estimated by many experts to exceed $100 billion dollars. Based on the dire need for charitable relief, the Internal Revenue Service announced on September 6, 2017, in IRS Notice 2017-48, special guidance on the tax treatment of leave-based donation programs for employers and employees to aid victims of Hurricane Harvey (there is a strong likelihood that this program will also be extended to the victims of Hurricane Irma whose devastation and destruction are still being assessed).
As a result of this IRS Notice, employers can establish leave-based donation programs that will allow their employees to elect to donate the employee’s vacation, sick or personal leave (paid time off) in return for a cash payment made by the employer, equivalent to the value of the donated time, to a charitable organization for victims of Hurricane Harvey. The organization must qualify as a charitable tax-exempt organization within the meaning of Section 170(c) of the Internal Revenue Code, which requires contributions or gifts to be used for the use of a state, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, exclusively for public purposes.
The leave time donated by the employee will not constitute gross income or wages to the employee, so long as the employer makes the payment of the value of the donated leave to a qualified organization, and so long as the payment is received by the organization before January 1, 2019. In addition, the employee will not be able to claim a charitable contribution deduction for the value of their leave-based donation.
Employers participating in this program are permitted to deduct the value of the cash payments made to the qualifying organization as a business expense under Section 162 of the Internal Revenue Code, or as a charitable contribution deduction.
This program allows employees to help Harvey victims who might otherwise not have extra funds available, and also allows employers to utilize the payments made as a business expense, which could be more advantageous to the employer, in certain situations, than a charitable deduction. Currently, this program is only available for victims of Hurricane Harvey; however, given the history of the IRS in making these leave-based programs available to victims of other natural disasters, there is a strong likelihood that this program will also be extended to victims of Hurricane Irma.