The IRS recently announced special tax relief for leave-based donation programs set up by employers to aid those directly affected by the COVID-19 pandemic. Under such programs, an employer can allow its employees to give up vacation, sick or personal leave in exchange for a cash contribution by the employer to a qualified charitable organization.
Two issues addressed
Ordinarily, leave-based charitable donations must be included in the donating employee’s income. In addition, the opportunity to elect such contributions usually raises the concern that eligible employees might be taxed on income that could have been donated because the ability to donate triggers “constructive receipt.” Notice 2020-46 addresses both tax issues.
First, cash payments that employers make to qualified tax-exempt organizations in exchange for vacation, sick or personal leave that their employees elect to forgo won’t constitute income to the employees if the payments are:
- Made before January 1, 2021, and
- For the relief of victims of the COVID-19 pandemic in the affected geographic areas.
These areas include all 50 states, the District of Columbia, Puerto Rico and four other U.S. territories. Such payments need not be included in Box 1, 3 or 5 of the employee’s Form W-2.
Second, the mere opportunity to make a leave donation won’t result in constructive receipt of income for employees. However, electing employees may not deduct the value of the donated leave on their income tax returns. Deductions by electing employees would result in “double-dipping,” because the donated leave will already have been excluded from their income. Employers will be permitted to deduct the contributions either as charitable contributions or as trade or business expenses, if applicable requirements are met.
A different kind of relief
Tax relief for leave donations has generally become standardized. However, this version differs in its description of the employer’s deduction by plainly stating — rather than implying — that the employer may rely on either the deduction for charitable contributions or the business expense deduction (again, provided applicable requirements are met). Contact us for further information.