In the aftermath of Hurricane Harvey, and in preparation for the looming threats of Hurricanes Irma and Jose, it is important to remember that there are some avenues available to employers and employees to encourage various forms of relief to the victims of those natural disasters without adverse tax consequences.
Employer Aid to Employee Disaster Victims
The Internal Revenue Code (the “Code” or “IRC”) has a provision that generally deems all transfers from employers to employees to be federally taxable income of the employee. This complicates the provision of disaster relief by an employer, either directly or through the employer’s private foundation, to its employees. In the wake of the 9/11 terrorist attack, the Code was amended to allow “qualified disaster relief payments” to be excluded from the employee’s income for income and payroll tax purposes while still being deductible by the employer. See IRC Sections 139 and 162. A “qualified disaster relief payment” is any amount paid to or for the benefit of an individual for any of the following relevant purposes:
- To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or
- To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent such need is attributable to a qualified disaster.
Note, however, that a qualified disaster relief payment does not include any amount for which insurance or other reimbursement is received. A “qualified disaster” for this purpose includes a presidentially declared disaster determined by the President to warrant assistance by the Federal Government. See IRC Section 165(h)(3)(C)(i).
Leave-Based Donation Programs for Hurricane Harvey Victims
The Internal Revenue Service (“IRS”) recently issued Notice 2017-48 which provides guidance on the federal tax treatment of leave-based donation programs to aid victims of Hurricane Harvey.
A leave-based donation program is a program under which employees can elect to forgo vacation, sick, or personal leave time and instead have their employer donate the value of such time to a charitable organization. Notice 2017-48 provides that such payments will not be treated as gross income or wages of the employee if they are made directly to a charitable organization described in IRC Section 170(c), for Hurricane Harvey relief efforts, and the payment is made before January 1, 2019. Because the income will be fully excluded from the electing employee’s income, the employee will not be entitled to a charitable deduction for making such an election. The Notice also provides that the employer will be allowed to deduct such payments as ordinary and necessary business expenses under IRC Section 162 instead of treating them as charitable deductions under IRC Section 170, which are subject to certain limitations.
Although Notice 2017-48 is limited to programs in support of Hurricane Harvey victims, the IRS has implemented similar programs for other hurricanes and is likely to do so again for future disasters.
Employee Donation Matching Programs
Employers often establish donation matching programs to encourage employee donations to relief efforts. If the employer has a foundation, the foundation can often be used as a vehicle to pool such donations while permitting the employee (and the employer) to receive an income tax charitable deduction.