As Texas continues its rebuilding efforts from the devastating effects of Harvey, your employees may be searching for a way to make a charitable contribution. Employees that want to contribute to the relief efforts might benefit from a leave-based donation program. Through such a program, employers can help employees turn certain types of accrued leave into cash donations to aid ongoing recovery efforts in Texas.

Leave-based programs are fairly easy to implement and administer. However, missteps by employers or employees may result in unintended and adverse tax consequences. As described in IRS Notice 2017-48, employees can elect to forgo vacation, sick, or personal leave in exchange for the value of the donated leave being paid directly from the employer to qualifying organizations for the relief of victims of Hurricane Harvey and Tropical Storm Harvey. Generally, for purposes of these programs, a qualifying organization is defined as the federal, state, or a local branch of government or private organization with 501(c)(3) tax exempt status, except those established for the purpose of testing for public safety.

Under these leave-based donation programs, the employer excludes the value of the forgone leave from the contributing employee’s wages. The cash payments (equal to the value of the donated leave) made by the employer to the qualifying organizations are excluded from the donating employee’s Form W-2 as income for purposes of federal taxable income (Boxes 1 and 3) and Medicare wages (Box 5). Under Notice 2017-48, the IRS will not treat the employee’s election to forgo the leave as constructive receipt of income. As the donated leave is not treated as taxable income to employees, they are not entitled to any deductions on their personal tax returns for their donated leave. However, under the IRS guidance for these programs, employers are permitted to deduct these cash payments as ordinary and necessary expenses under IRC § 162, rather than charitable donations under § 170.

To qualify for this favorable tax treatment on donated leave, employers must make the cash payment (equal to the value of the forgone leave) to a qualifying organization prior to January 1, 2019.