The IRS recently announced tax relief designed to encourage Hurricane Sandy recovery efforts. The tax relief programs that have been announced are similar to programs offered in response to Hurricane Katrina in 2005, including non-taxable employee leave donations and tax-free relief payments to employees.
- Leave-Based Donation Programs. Employers may establish programs whereby employees can donate paid sick, personal, or vacation leave to charities to aid victims of Hurricane Sandy. Under these programs, the employer reduces the employee’s accrued leave and then makes a corresponding cash donation to the charity. Typically, the donated leave would be treated as compensation to the employee and included in her taxable income; however to encourage donations to help victims of Hurricane Sandy, IRS Notice 2012-69 provides that leave donations to certain charities aiding victims of Hurricane Sandy will not be treated as taxable income to the employee and can be deducted by the employer under Section 162 of the Internal Revenue Code. To be eligible for this treatment, the payment to the charity must be made prior to January 1, 2014.
- Tax-free Relief Payments. Because Hurricane Sandy has been designated as a qualified disaster for federal tax purposes, employers may make qualified disaster relief payments to employees affected by the storm. Qualified disaster relief payments are governed by Section 139 of the Internal Revenue Code and cover necessary personal, family, living or funeral expenses or expenses to repair or rehabilitate personal residences or repair or replace their contents (to the extent that these expenses are not covered by insurance). Payments may be made to an employee by the employer or the employer’s private foundation and will not be included in the employee’s income for federal income tax purposes or subject to employment tax (FICA).
- Deadlines Postponed. The IRS has also postponed filing deadlines for taxpayers in affected areas of New York, New Jersey and Connecticut. Affected individuals will have until February 1, 2013, to pay fourth quarter individual estimated tax payments (which otherwise would be due January 15, 2013). Affected employers will have until February 1, 2013, to file payroll tax returns for the third and fourth quarters (which otherwise would be due on October 31, 2012, and January 31, 2013); the extension also applies to the payments associated with these returns.
We understand that the IRS is considering granting other forms of relief. It is also possible that Congress will pass legislation similar to the Katrina Emergency Tax Relief Act and the Gulf Opportunity Zone Act, which provided special rules for Hurricane Katrina victims regarding distributions and loans from qualified retirement plans, and that the Department of Labor will extend certain deadlines for health plan participants, as it did after Hurricane Katrina.