I have an S corporation in Indiana and may have to lay off some of our hourly workers due to slowing sales. A colleague recommended that instead of a normal “layoff” strategy, we should volunteer our employees to charitable, not-for-profit organizations, pay the employees their regular rate of pay for the hours they are volunteering, and then submit their payroll dollars from that time as a charitable contribution. Is this legal? —Julie Parrett
Sure, it’s legal, but be prepared to draw the ire of the Internal Revenue Service, says James Tamke, a tax attorney and certified public accountant in South Bend, Ind.
“An increase in charitable contributions coupled with a decrease in sales, would very likely trigger an IRS audit,” says Tamke. Not to mention that if the firm gets audited, the IRS could disallow the entire deduction — not just the contributions in excess of the 50% adjusted gross income limitation. The Internal Revenue Code typically only allows deductions for charitable contributions of money and property — not for the payment of services.
Writing off employee pay as a charitable contribution won’t save you money either, notes Tamke. Typically, S Corporations’ charitable contributions are limited to 50% of its adjusted gross income, but the wages it pays its employees are 100% tax deductible. So, a firm with an adjusted gross income of, say, $400,000, could deduct $200,000 of what it pays out in “charitable” dollars. Any donations (or volunteer wages) above that $200,000 threshold couldn’t be deducted. On the other hand, if the firm paid out $250,000 in wages to its employees, it could write off the full amount.
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