Monday, October 2, 2023

IRS Enacts Unlimited Above the Line Charitable Contribution Deduction for Non-Itemizers

Tax Deductions for Individuals: A Summary -


In one fell swoop, the IRS proved that nothing is really sacred in tax law. Constructive receipt, assignment of income, above the line stuff, things we might study for weeks in class; who needs them?  Oh, don't get me wrong.  I'm all for making the laws work in time of national emergency.  And Lord knows, the fires in Hawaii created an ongoing national emergency even as we speak.  My only beef is that if we can find a way to make the law work during times of national emergency, why can't we find to make the law work during other times?  

I'm talking about the charitable contribution deduction, which is currently inaccessible to non-itemizers.  The number of itemizers is down to about 10% by now and the measly $300/$600 above the line deduction has expired.  No word on when Congress will act on an extension proposed earlier this year.  But in the meantime, the IRS has exercised its prosecutorial discretion to announce that if an employee donates accrued leave to a charity, the employee will be treated as having no income at all.  Viola!  Above the line deduction.  Unlimited too, according to Notice 2023-69:

TREATMENT OF LEAVE-BASED DONATION PAYMENTS In response to the extreme need for charitable relief for victims of wildfires beginning on August 8, 2023, in the State of Hawaii (2023 Hawaii Wildfires), employers may have adopted or may be considering adopting leave-based donation programs. This notice provides guidance under the Internal Revenue Code (Code)1 on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs for the relief of victims of the 2023 Hawaii Wildfires. This guidance is similar to the guidance provided in Notice 2001-69, 2001-46 IRB 491, as modified and superseded by Notice 2003-1, 2003-2 IRB 257, regarding charitable relief following the September 11, 2001, terrorist attacks.

EMPLOYER LEAVE-BASED DONATION PROGRAMS Under employer leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for their employers making cash payments to charitable organizations described in section 170(c) (section 170(c) organizations). Cash payments made by an employer to section 170(c) organizations under an employer leave-based donation program are referred to as “employer leave-based donation payments.”

TREATMENT OF QUALIFIED EMPLOYER LEAVE-BASED DONATION PAYMENTS Employer leave-based donation payments made by an employer before January 1, 2025, to section 170(c) organizations to aid victims of the 2023 Hawaii Wildfires (qualified employer leave-based donation payments) will not be treated as gross income or wages (or compensation, as applicable) of the employees of the employer. Similarly, employees electing or with an opportunity to elect to forgo leave that funds the qualified employer leave-based donation payments will not be treated as having constructively received gross income or wages (or compensation, as applicable). Employers should not include the amount of qualified employer leave-based donation payments in Box 1, 3 (if applicable), or 5 of the electing employees’ Forms W-2. Electing employees are not eligible to claim charitable contribution deductions under section 170 for the value of the forgone leave that funds qualified employer leave-based donation payments. An employer may deduct qualified employer leave-based donation payments under the rules of section 170 or the rules of section 162 if the employer otherwise meets the respective requirements of either section of the Code.

DRAFTING INFORMATION For further information, please contact Clara L. Raymond of the Office of Associate Chief Counsel (Income Tax and Accounting) at (202) 317-4718 (not a toll-free call). 

And guess what else.  The employer doesn't have to fool with 170 limitations to account for the donation that the employer doesn't really make in the first place.  The amount constructively received by, but not taxed to, employees can be deducted by the employer as an ordinary and necessary business expense, thereby giving employers, too, an unlimited charitable contribution deduction they might not otherwise get under 170.  

I am ok with it, I guess.  Its for a good cause.  I just wish we could fix the Code to allow for the part that allows individuals to take above the line deductions without having to indulge the white lies. 

darryll k. jones

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