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IRS Won’t Tax Employees for COVID-19 Donations of Paid Time Off

Posted on June 12, 2020

Payments made by employers through leave-based charitable donation programs to help coronavirus victims this year won’t be taxable, according to the IRS.

Notice 2020-46, 2020-27 IRB 1, released June 11, says an employer’s cash payments to charitable organizations in exchange for vacation, sick, or personal leave that its employees forgo won’t be considered compensation to the employees provided the payments are made to help COVID-19 victims in affected geographic areas before January 1, 2021.

Employees who forgo leave won’t be treated as having constructively received gross income or wages, the IRS said, adding that they may not claim a charitable deduction on the value of the forgone leave.

Employers, however, may deduct the payments as a charitable contribution or business expense if they meet the relevant requirements.

Veena Murthy of Crowe LLP said the IRS’s notice is interesting in that it addresses what happens when employees forgo vacation and sick time for a company donation to a charitable organization.

Murthy pointed out that in Notice 2006-59, 2006-2 C.B. 60, the IRS issued guidance on the tax consequences of leave-sharing programs that allow employees to put their leave in an employer-sponsored bank for use by other employees affected by a major disaster. 

There is also old IRS guidance that would allow employees to donate their salaries — but not leave — via a charitable organization of the employer to provide assistance to other employees and other charitable recipients, Murthy noted.  

“What’s novel about this is that it’s using the charitable organization mechanism for the employee to actually give up leave, as opposed to cash,” Murthy said. “That’s what’s kind of amazing about it.”

John E. McGrady III of Buchanan Ingersoll & Rooney PC said the guidance was welcome. He said that while participating employees won’t be able to claim a charitable contribution for the value of the donated leave, the notice also makes clear that the value of the donated leave won’t be treated as taxable income to the employee.  

“As a condition to this favorable treatment, however, employers must contribute the value of the donated leave to an eligible charitable organization before January 1, 2021,” McGrady pointed out.

David L. Thompson of the National Council of Nonprofits praised the IRS notice for its substance-over-form approach.

“Employees who are working want to give back to the nonprofits serving their communities during this crisis,” Thompson said. “The only thing that would discourage their employers from turning accrued paid leave into cash donated to charitable organizations might have been the IRS. Today’s notice puts the IRS clearly on the side of compassion, good sense, and community-based solutions.”

However, Suzanne Friday of the Council on Foundations, though appreciating the IRS’s support of leave-based donation programs, questioned the decision to limit the benefit to organizations that provide COVID-19 relief and that do so before 2021.

“This is helpful, but we would prefer to see a more expansive rule that encourages giving beyond January 1, 2021, and to [section] 170(c) organizations that are not only helping victims of the pandemic but providing other essential services as well,” Friday said. “This country is experiencing multiple crises right now, and any new tax benefits for charitable giving should be applied equally across the board.”

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