Earlier this year, the IRS released Notice 2020-46, providing guidance for employees and employers establishing and participating in leave-based donation programs that provide assistance to victims of the COVID-19 pandemic. Read on for answers to frequently asked questions about this type of program, as well as federal income and employment tax implications for participants.
What are leave-based donation programs?
Leave-based donation programs originated in 1997, when Congress authorized federal agencies to create plans allowing federal employees to donate unused leave to fellow employees who had been impacted by a specified major disaster. The IRS later ruled that non-governmental organizations were also eligible to create such plans. In 2017, after Hurricane Harvey, the IRS expanded the plans by allowing employers to use the donated leave to make cash payments to qualified charitable organizations assisting disaster victims.
Leave-based donation programs are optional and at the discretion of the employer.
What are the requirements for leave-based donation programs related to COVID-19?
According to the new IRS notice, employees can choose to forego vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations providing relief for victims of the COVID-19 pandemic. Employers’ payments must be made before Jan. 1, 2021, to qualify.
What is the tax treatment of the employee-donated leave?
Cash payments for the employee’s donated leave will not be treated as wages or compensation to the employee or otherwise included in their gross income. It follows that the employee is thus not permitted to claim a charitable contribution deduction on their personal income tax return for the value of the donated leave.
Employers should not include the value of the donated leave on the employee’s W-2.
What is the tax treatment of the employer contributions made to charitable organizations?
An employer may choose to deduct these cash payments under the rules of Internal Revenue Code (IRC) sections 170 (charitable contributions) or 162 (trade and business expenses/wages) provided the employer “otherwise meets the respective requirements of either section,” the notice states. Consider, for example, the limitations on charitable contributions to a percentage of the employer’s taxable income.
In the current economic environment, employees as well as employers are looking for innovative ways to help their co-workers. Before starting a leave-based donation program, it is important to understand the tax implications that such programs could generate.
For more information, view the full IRS Notice 2020-46.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Coronavirus Resource Center
InsightNew law permits PPP loan recipients to obtain Employee Retention Credits, extends and expands ERC for 2021Dana FriedRead how ERC requirements have changed for 2021, including what counts as qualified wages, who is an eligible employer, the maximum credit amount, and more.
InsightHow individual and business tax rates, credits, and more could change under the Biden presidencyJoe Biden has proposed or supported changes across the tax landscape. Read a summary of notable ones that could impact individuals and businesses.
InsightTreasury and IRS release final regulations on treatment of carried interestMoshe Biderman, Jonathan R. Collett, Robert Richardt, Mark PapaThe new regulations include substantial taxpayer-friendly modifications. In a newly published article for Bloomberg Tax, CohnReznick’s Moshe Biderman, Jonathan R. Collett, Robert Richardt, and Mark Papa break down the regulations.