On September 8, 2005, the IRS approved employer leave-based donation programs established to help victims of Hurricane Katrina. A similar program to provide relief for victims of the terrorist attacks of September 11, 2001 expired January 1, 2003.

The leave-based donation program permits an employee to forego vacation, sick, or personal leave in exchange for the employer’s cash payments to a tax qualified charity that will use the funds for Hurricane Katrina victims. The IRS will not consider the cash contributions made by the employer to be gross income to the employee nor will it consider the employee to have constructively received the contributions as taxable compensation. Further, the employer will not have to report the contributions on the employee’s Form W-2.

The employee may not claim a charitable deduction for his or her donation of paid time off. However, the employer may take a deduction for the payments, not as charitable donations, but rather as ordinary business expenses.

This IRS treatment will be applied for all contributions made under an employer’s qualified leave-based donation program before January 1, 2007.

Taft’s attorneys can answer your questions about this IRS guidance and help establish a qualified leave-based program for your employees.