To enable employees to help victims of the pandemic, employers may establish leave-based donation programs for making cash contributions to charitable organizations described in Section 170(c) of the Internal Revenue Code (the Code).
A little more than one year ago, the IRS released Notice 2020-46, detailing such leave-based donation programs and providing guidance on the federal income and employment tax treatment of the value of employees' donated leave. While the guidance in Notice 2020-46 expired on December 31, 2020, the IRS recently released Notice 2021-42, which retroactively extends the federal income and employment tax treatment described in Notice 2020-46 to qualifying contributions made prior to January 1, 2022.
Tax Treatment of Forgone Leave
Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for their employer making a cash payment to a charitable organization providing aid to victims of COVID-19. Pursuant to Notice 2020-46 and Notice 2021-42, these cash payments will not be treated as wages or otherwise be included in the gross income of the employees if the payments are:
- 1. Made to a charitable organization described in Section 170(c) of the Code providing relief to victims of the COVID-19 pandemic in the United States or the five U.S. territories covered by federal major disaster declarations, and
- 2. Paid to such Section 170(c) charitable organization before January 1, 2022.
Accordingly, employers should not include these payments in Box 1, 3 (if applicable), or 5 of the Form W-2 for employees who elect to forgo their vacation, sick, or personal leave under these leave-based donation programs.
Tax Treatment of Charitable Contributions
Employees who elect to forgo their leave under these leave-based donation programs may not claim a charitable contribution deduction under Code Section 170 for the value of the donated leave. Employers, however, may deduct cash payments made under these leave-based donation programs under Code Section 170 (as a charitable contribution) or Code Section 162 (as a business expense), provided the requirements for such deductions are otherwise met.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory..