IRS Announces Special Treatment for Employer-Based Leave Donation Programs

In the aftermath of Hurricane Katrina, employers may be considering adopting a leave-based donation program to aid victims of this hurricane.  Through these programs, employees donate their vacation, sick or personal leave time, which is then converted to cash and paid by the employer to a qualified tax-exempt organization.

The tax consequences to the employees making such donations are unclear, and the IRS generally takes the position that the employees must include the amount of the donated leave in their income.  However, IRS Notice 2005-68 provides for special treatment of those donations in support of the relief efforts for Hurricane Katrina victims.  According to the notice, employees donating time to organizations that provide relief to the victims of Hurricane Katrina do not have to include the cash payments in income if the donations are made prior to January 1, 2007.  A charitable deduction may not be taken by the employee, however.  Only the employer is entitled to a deduction for the cash payments.

It is not clear whether the IRC provides the authority to take this action, although the IRS took similar action after the terrorist attacks on September 11, 2001. 

IRS Notice 2005-68 provides guidance to both employees donating time and to employers making the cash payments.