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IRS Addresses Tax Treatment of Employer Programs to Aid Hurricane Victims

(Parker Tax Publishing October 2017)

The IRS issued guidance on the tax treatment of leave-based donation programs aimed at aiding victims of Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, and Tropical Storm Irma. Notice 2017-48; Notice 2017-52.

In response to the need for charitable relief for recent hurricane victims, some employers have adopted or are considering adopting leave-based donation programs. Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Code Sec. 170(c).

In Notice 2017-48 and Notice 2017-52, the IRS explains the income and employment tax treatment of cash payments made by employers under leave-based donation programs for the relief of victims of Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, and Tropical Storm Irma.

The guidance provides that the IRS 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:

(1) made to the Code Sec. 170(c) organizations for the relief of victims of Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, and Tropical Storm Irma; and

(2) paid to the Code Sec. 170(c) organizations before January 1, 2019.

Additionally, the IRS will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees. Electing employees may not claim a charitable contribution deduction under Code Sec. 170 with respect to the value of forgone leave excluded from compensation and wages. The IRS will not assert that an employer is permitted to deduct these cash payments exclusively under the rules of Code Sec. 170 rather than the rules of Code Sec. 162.

Compliance Tip: Cash payments to which the notices apply need not be included in Box 1, Box 3 (if applicable), or Box 5 of the Form W-2.

In an earlier pronouncement, Notice 2006-59, the IRS provided guidance on the federal tax consequences of certain leave-sharing plans that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. The notice states that IRS will not assert that a leave donor who deposits leave in an employer-sponsored leave bank under a major disaster leave-sharing plan realizes income or has wages, compensation, or rail wages with respect to the deposited leave, provided that the plan treats payments made by the employer to the leave recipient as "wages" for employment and income tax withholding purposes, and as "compensation" for railroad-wage reporting purposes, unless excludible under a specific provision of the Code.

In addition, under Code Sec. 139, individuals can to exclude from gross income any amount received by an individual as a qualified disaster relief payment.

For a discussion of the tax treatment of disaster relief payments, see Parker Tax ¶79,300.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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