Employers Can Provide Tax-Free Benefits to Employees Affected by Hurricane Sandy

by Ballard Spahr LLP

[authors: Christopher A. Jones, Jean C. Hemphill]

In the aftermath of Hurricane Sandy, the IRS recently reminded taxpayers of several relief provisions in the Internal Revenue Code that will provide benefits to taxpayers affected by the hurricane. The agency also announced that it will implement several programs to allow employers and other interested parties to help the victims without unanticipated tax consequences.

First, because FEMA determined that Hurricane Sandy was a major disaster, the storm constitutes a qualified disaster for federal tax purposes. Consequently, payments by an employer or other person to cover necessary personal, family, living, or funeral expenses of a hurricane victim that were not covered by insurance are excluded from the recipient's income by law and are not subject to income or employment tax withholding. Such excludable payments include payments for repairing or rehabilitating personal residences or repairing or replacing the contents if such expenses were not covered by insurance. Additionally, the designation of Hurricane Sandy as a qualified disaster means that an employer-sponsored private foundation may provide disaster relief to qualifying employees without affecting the foundation’s tax-exempt status.

Second, the IRS announced (as it did for the September 11 terrorist attacks and for Hurricane Katrina) a special program to allow employers to implement leave-based donation programs to aid Hurricane Sandy victims. Under such programs, an employee may donate his or her vacation, sick, or personal leave in exchange for an employer cash payment to a qualified tax-exempt organization providing relief for the hurricane victims. This program is applicable as long as the employer makes the payment by the end of 2013, and the donated leave will not be included in the employee’s income or wages. Additionally, the employer will be permitted to deduct the amount of the cash payment to the qualified organization without regard to limitations on charitable deductions. Employees receiving the tax benefit of the income exclusion will not be allowed to claim a charitable deduction.

Third, the IRS said it will expedite the review of applications for exempt status by organizations seeking to provide relief for the hurricane victims. Taxpayers are advised to caption their applications for recognition of tax-exempt status "DISASTER RELIEF HURRICANE SANDY" to receive expedited attention. The IRS urged taxpayers to look to existing charitable organizations, however, because such organizations tend to already have fund-raising and distribution infrastructures in place.

Finally, the IRS extended several return filing and tax payment deadlines for taxpayers in the areas of New Jersey, New York, and Connecticut that FEMA has designated as being within the major disaster area (an area that FEMA may expand in the near future). The filing and payment extensions are available not only to residents of the qualified disaster area, but also, upon application to the IRS, to workers assisting the relief activities in the area who are affiliated with recognized government or philanthropic organizations and to taxpayers whose books, records, or professional tax advisers are located within that area.

More detailed information about the various relief programs is available on the IRS website, which the IRS will continue to update with additional developments.

Attorneys at Ballard Spahr can advise on assisting employees affected by Hurricane Sandy, developing a leave-based donation program to support the hurricane victims, or any other issues related to the IRS relief programs. If you have questions, please contact Jean C. Hemphill at 215.864.8539 or hemphill@ballardspahr.com, Christopher A. Jones at 215.864.8424 or jonesc@ballardspahr.com, or the Ballard Spahr attorney with whom you work.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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