The Internal Revenue Service (IRS) released Notice 2020-46 (the Notice) on June 11, 2020 providing guidance for employers whose employees donate their sick, vacation or personal leave time as a result of COVID-19. The Notice provides guidance on the federal income and employment tax treatment of cash payments made by these employers under leave-based donation programs to aid victims.
If a leave-based donation program is adopted by an employer, its employees can elect to forgo their vacation, sick, or personal leave time for cash payments made by the employer to section 170(c) charitable organizations. An employer can deduct these cash payments under the rules of section 170 as a charitable contribution or section 162 as a business expense if the employer meets the requirements for either of these sections.
Under the Notice, vacation, sick, or personal leave that employees elect to forgo will not be treated as wages or compensation to the employees if certain conditions are met. To meet the conditions, the payment needs to be made before January 1, 2021 and the payment needs to be made to a section 170(c) organization for the relief of COVID-19 pandemic victims. The employees electing to forgo their vacation, sick or leave time are not able to claim charitable contribution deductions under section 170. However, the amount of applicable cash payments is not included in Box 1, 3 or 5 of the Form W-2.
To accompany the Notice, the IRS also issued Information Release IR-2020-119 on June 11, 2020, which is published on its website (can be viewed by clicking here).
Overall, companies can use these cash payments to claim a charitable or other tax deduction, while employees do not count these payments as taxable wages or gross income. And best of all, this may be another source of much needed funding for charitable organizations to provide relief to victims of the COVID-19 pandemic.
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