The Internal Revenue Service (IRS) issued Notice 2020-46 providing guidance to employers whose employees forgo sick, vacation, or personal leave to aid victims of COVID-19.
Generally, when an employee donates sick, vacation, or personal leave to which he or she otherwise is entitled, the donation is treated as an assignment of income – the employee is treated as constructively receiving leave payments and then donating cash. Therefore, the employee has taxable income as a result of the leave with an offsetting charitable deduction (which deduction is subject to several limitations and may not provide a tax benefit to all employees). However, the IRS does not apply this rule when employees forgo paid leave in exchange for their employer’s donation to a qualified tax-exempt organization that aids victims of certain major disasters.
Notice 2020-46 confirms that, because the COVID-19 pandemic was declared a major disaster under the Stafford Act in all 50 states, the District of Columbia and five U.S. territories, employers can implement tax-favored leave donation programs to support charities that are providing relief to persons affected by COVID-19. Cash payments an employer makes to such a charitable organization providing COVID-19-related relief in exchange for vacation, sick, or personal leave donated by employees will not be treated as wages to the employees or otherwise be included in the gross income of the employees if the payments are paid by the employer to the charitable organization before January 1, 2021.
Employees who elect to donate their paid leave under such a program may not also claim a charitable contribution deduction for the contribution. Employers who otherwise meet the necessary requirements may deduct payments to the charitable organizations as business expenses or as charitable contributions, to the extent such payments otherwise would be deductible.