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Leslie Bonacum
Neil Allen

Leave-based Donations Easier Under Latest Irs Notice, CCH Says

(RIVERWOODS, ILL., October 31, 2001) – The Internal Revenue Service is making it easier for employees to donate the value of their unused vacation, sick leave or personal days to charity, according to CCH INCORPORATED (CCH), a leading provider of tax and payroll law information and software. A leave-based donation program is a simple way for employees to benefit their favorite causes by having their companies contribute the value of their unused leave to charity. With the interest in charitable giving on the rise following the attacks of September 11, employees and employers alike are considering such programs. But until now, IRS rules have stood in their way.

"The rule was that if an employee donated the wages for his or her leave to a charity, the employee would still be taxed on it," said John Strzelecki, senior payroll analyst with CCH. "Even worse, if the funds were made available without substantial restriction, the fact that employees were given the opportunity to make that kind of donation meant that technically they could be taxed on their unused leaves even if they didn’t donate it – a concept called ‘constructive receipt’ of income. 

So at a company with a leave donation program, an employee who carried over three days of unused vacation from one year to the next could be subject to taxes on three days’ wages they hadn’t received."

Thus, employers had no incentive and were discouraged from setting up such programs as well, even though such deductions from employees' paychecks are legal under the Code, according to Strzelecki.

A Simpler and Less Taxing Process

To make the process simpler – and literally less taxing – for all concerned, the IRS in a recent notice stated that it will not treat payments made under a leave-based donation program to a charitable organization by an employer as gross income or wages of the employee. In addition, an employee’s opportunity to forego leave will not make the unused leave taxable as "constructively received" income.

Employees making leave-based donations will not be allowed to take them as charitable contributions if they itemize deductions of their tax returns, but they won’t be taxed on their generosity.

"The person at the IRS I’ve talked to sees a simple process. If you’ve got eight hours of leave coming and you’re paid $15 an hour, and your employer offers a donation program, you could donate $120 to charity, with no withholding for income tax or payroll taxes. Your employer would simply deduct eight hours from your leave bank," Strzelecki said.  Simple as it seems, the IRS is asking for comments on the taxation of leave-based programs, and the favorable treatment will not necessarily last beyond the end of 2002.

"With the more favorable treatment, more employers may be interested in starting such programs, but more questions may also be raised about the nuts and bolts of how they work," Strzelecki observed.


CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company annually produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America.

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