The IRS on Thursday issued guidance on leave-based donation programs, permitting employers to make deductible monetary donations for relief of victims of the COVID-19 pandemic based on the value of sick, vacation, or personal leave that employees voluntarily forgo (Notice 2020-46). The donated amounts will not be treated as compensation to the employees, and employees will not be allowed to claim a charitable contribution deduction for the value of forgone leave.
Cash payments an employer makes to a Sec. 170(c) organization in exchange for vacation, sick, or personal leave that its employees elect to forgo will not be treated as wages (or compensation) to the employees or otherwise be included in the employees’ gross income if the payments are: (1) made to Sec. 170(c) organizations for the relief of victims of the COVID-19 pandemic in affected geographic areas; and (2) paid to the organization before Jan. 1, 2021.
In addition, employees electing to forgo leave will not be treated as having constructively received gross income or wages (or compensation, whichever applies). Employers should not include those payments in box 1, “Wages, Tips, Other Compensation”; box 3, “Social Security Wages”; or box 5, “Medicare Wages and Tips” of Form W-2, Wage and Tax Statement. Electing employees may not claim a Sec. 170 charitable contribution deduction for the value of forgone leave.
The notice states that an employer may deduct these cash payments as charitable contributions under Sec. 170 or as ordinary and necessary business expenses under Sec. 162 if the employer otherwise meets the requirements of either section.
The affected geographic areas include all 50 states, the District of Columbia, and five U.S. territories, including Puerto Rico and the U.S. Virgin Islands.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.
For tax-related resources, visit the AICPA’s COVID-19: Tax resources page.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.