IRS Notice 2020-46 (June 11, 2020)
Available at https://www.irs.gov/pub/irs-drop/n-20-46.pdf
The IRS has announced special tax relief for leave-based donation programs set up by employers to aid victims of the COVID-19 pandemic. Under a leave-based donation program, an employer may permit its employees to give up their vacation, sick, or personal leave in exchange for cash payments by the employer to charitable organizations. 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 make a donation triggers “constructive receipt.”
Like similar recent guidance (e.g., see our Checkpoint article), this notice addresses both tax issues. First, cash payments that employers make to qualified tax-exempt organizations (as described in Code § 170(c)) in exchange for vacation, sick, or personal leave that their employees elect to forgo will not constitute income to the employees if the payments are made before January 1, 2021, for the relief of victims of the COVID-19 pandemic in the affected geographic areas. Those 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 will not result in constructive receipt of income for employees. Electing employees may not deduct the value of the donated leave on their income tax returns. [EBIA Comment: 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 under Code § 170 or as trade or business expenses under Code § 162, if the applicable requirements are met.
EBIA Comment: As we have previously noted, the tax relief for leave donations has become standardized. This version, however, differs in its description of the employer’s deduction by plainly stating that the employer may rely on either the deduction for charitable contributions or the business expense deduction, provided the applicable requirements are met. Past relief merely implied the employer’s ability to take a business expense deduction unhindered by the limit on corporate charitable contributions, by stating that the IRS “[would] not assert” that the only available deduction was under Code § 170. For more information, see EBIA’s Fringe Benefits manual at Sections XXII.E (“Leave-Sharing and Other Donation Programs”) and XXII.B.2 (“Tax Trap: Giving Employees the Choice to Cash Out Vacation/PTO Days Can Create Tax Problems”). See also EBIA’s Cafeteria Plans manual at Sections III.B (“The Constructive Receipt Doctrine and the Code § 125 Safe Harbor”) and III.G (“Constructive Receipt and Cash-Out of Unused Vacation Days”).
Contributing Editors: EBIA Staff.