As companies and workers throughout the United States struggle to understand the implications of the March 11 earthquake and tsunami in Japan, many also struggle with how best to help. This update outlines several ways to provide targeted support to U.S. companies' employees working in Japan.
May our company provide financial assistance directly to our employees located in Japan?
Yes it may. For those employees who pay U.S. income tax, any financial assistance they receive from the company will generally be U.S. taxable income, unless all the following conditions are met:
- The U.S. government declares the earthquake a disaster;
- The payments are made and used to pay for personal, family, living or funeral expenses incurred as a result of the disaster; or for the repair of a personal residence or its contents lost or damaged as a result of the disaster; and
- The expenses are not covered by insurance or some other source.
Payments that meet these conditions are "qualified disaster relief payments." Companies and employees should maintain records that demonstrate compliance with these conditions.
The income exclusion described above does not apply for purposes of Japanese income tax.
May our company foundation provide financial assistance directly to company employees in Japan?
Maybe. First, the payments must meet the requirements of a "qualified disaster relief payment" described above.
Second, the pool of eligible recipients needs to be sufficiently large. There is no clear rule as to how large the pool must be, but a few dozen is probably too small, and 100 or more is probably large enough.
Third, directors, officers, and key employees of the foundation and members of the selection committee generally are not eligible for assistance because of the private foundation self-dealing rules.
Fourth, the awards of assistance must be determined by an "independent" selection committee, which means that a majority of the committee members must be persons who are not in a position to exercise substantial influence over the company. In other words, a majority of the committee members should probably be lower-level managers, rank-and-file employees, or persons from outside the company.
Fifth, financial assistance given by a foundation must meet a charitable need. In the immediate aftermath of the disaster, some employees may not have access to cash to cover basic necessities of life, and a foundation may provide cash for this purpose without determining the employee's overall financial need. Outside of emergency situations, though, the foundation may provide cash assistance to individuals only if the individuals have demonstrated financial need.
Finally, foundations making disaster assistance grants to individuals should keep records of the amount of each grant, the name and address of the recipient, the purpose for which it was given, the criteria used to select the recipient, and the nature of the recipient's relationship(s) to the company and/or the foundation. In true emergency situations, the IRS may waive some of these recordkeeping requirements.
How can our employees not directly affected by the earthquake and tsunami assist our employees who were?
Employees may make contributions to a company fund established for the purpose of making qualified disaster relief payments described above. The fund may simply be a separate account owned by the company. Employee contributions to such a fund are not deductible as charitable contributions for U.S. tax purposes.
If the company foundation or another charitable organization has established a fund that meets the requirements described above for foundations, contributions to the fund are deductible for U.S. tax purposes.
May our company make a contribution directly to a Japanese charitable organization or governmental agency for general disaster relief in Japan?
Company contributions directly to Japanese charitable organizations and governmental agencies are not deductible as charitable contributions for U.S. tax purposes.
A company foundation grant to a Japanese charity will generally require that the foundation make an "equivalency determination" or exercise "expenditure responsibility," which are processes that involve certain due diligence, documentation, and reporting. Expenditure responsibility is not required for a grant to a foreign governmental agency.
I have a donor-advised fund at a community foundation. Can I use that fund to help?
Donor-advised funds may make grants to U.S. public charities that are providing disaster relief in Japan, but as a general rule, such funds are not permitted to make grants to individuals. There is an exception, however: a donor-advised fund established specifically to provide relief from one or more federally declared disasters may make grants to individuals if the grants meet the same requirements as are described above with respect to company foundations.