June 16, 2020 IRS issues guidance on leave-based donation programs in response to COVID-19 pandemic In Notice 2020-46, the IRS said cash payments made under leave-based donation programs for victims of the COVID-19 pandemic are not wages, are not included in gross income and cannot be claimed as charitable contributions by employees. However, employers may deduct these cash payments as charitable contributions or business expenses. Leave donation programs Under leave-based donation programs, employees can elect to forgo vacation, sick or personal leave in exchange for cash payments that the employer makes to IRC Section 170(c) charitable organizations. These cash payments will not be treated as wages or otherwise be included in the gross income of the employees if the payments are:
These cash payments should not be included in Box 1, 3 (if applicable), or 5 of Form W-2. In addition, employees may not claim a charitable contribution deduction under IRC Section 170 for the value of forgone leave. Employers may deduct these cash payments in accordance with IRC Section 170 or IRC Section 162 if the employer otherwise meets the respective requirements. Previous leave-based donation programs The IRS has recognized similar tax consequences for leave-based donation programs in the past. In Notice 2017-48, the IRS gave similar guidance about the consequences of forgoing leave in return for leave donations in response to Hurricane Harvey. In Revenue Ruling 90-29, the IRS ruled that the leave an employee donated to a bona fide employer-sponsored leave-sharing arrangement to be given to employees with medical emergencies was considered wages for the recipient of the leave, but not the employee who donated the leave. Employees who donated leave did not realize any income and incurred no deductible expense or loss as a result of their donations. Similarly, in Notice 2006-59, the IRS said an employer-sponsored leave-sharing program allowing employees to donate leave to other employees who are impacted by a major disaster resulted in wages to the recipient, not the donor, and the donor does not realize any income or incur any losses. (Major disasters associated with COVID-19 have been declared for all 50 states, the District of Columbia and five U.S. territories.) Implications The usefulness of the relief provided in Notice 2020-46 will depend on the employer's circumstances. Some employers may be interested in making leave donations available to their employees. On the other hand, those struggling financially this year may require or strongly encourage employees to use their accrued leave. Other employers may be reluctant to adopt a leave-donation program due to the lack of clarity around the criteria for excluding such payments from wages (i.e., that the payments have to be made to an eligible charitable organization "for the relief of victims of the COVID-19 pandemic" in "affected geographic areas"). Employers that do establish a leave donation program under Notice 2020-46 should document how the payments were used for the relief of victims of the COVID-19 pandemic, as well as their determination that the funds were spent within the relevant geographic area. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us here. ———————————————
| |||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||
