Question:

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

Answer:

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Send us an email and we’ll try to answer it for you. Due to the volume of questions we receive, we are not able to answer all questions. Questions that are selected for publication may be edited for length and clarity. 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.