Written by Chetan Dogra, CPA
The IRS recently announced special tax relief for leave-based donation programs set up by employers to aid those directly affected by the COVID-19 pandemic. Under such programs, an employer can allow its employees to give up vacation, sick or personal leave in exchange for a cash contribution by the employer to a qualified charitable organization.
Two issues addressed:
Conventionally, leave-based charitable donations must be included within the donating employee’s income. Additionally, the opportunity to elect such contributions usually raises the concern that eligible employees may be taxed on income that could have been donated as the ability to donate triggers “constructive receipt.” Take a look at how 2020-46 addresses both tax issues.
Firstly, cash payments that employers make to qualified tax-exempt organizations to exchange for vacation, sick or personal leave that their employees elect to make do without won’t constitute income to the employees if the payments are:
1) Made before January 1, 2021, and
2) Purposed towards the relief of victims of the COVID-19 pandemic in the affected geographic areas.
These areas cover all 50 states, the District of Columbia, Puerto Rico and four other U.S. territories. Said payments need not be included in Box 1, 3 or 5 of the employee’s Form W-2.
Secondly, the sheer opportunity to make a leave donation won’t result in constructive receipt of income for employees. However, electing employees may not deduct the value of the donated leave on their income tax returns. Deductions by electing employees would result in “double-dipping,” as the donated leave will already have been excluded from their income. Employers will be permitted to deduct the contributions either as charitable contributions or as trade or business expenses, should the applicable requirements be met.
A different kind of relief:
Tax relief for leave donations has generally become normalized. However, this version differs in its description of the employer’s deduction by expressly stating — rather than implying — that the employer may rely on either the deduction for charitable contributions or the business expense deduction (again, provided applicable requirements are met). Feel free to contact us for further information.
Share This Article With Your Friends: