On June 11th, the IRS provided guidance for employers whose employees forgo sick, vacation or personal leave because of the COVID-19 pandemic. Notice 2020-46, 2020-27 I.R.B. __ (June 29, 2020), IR-2020-119.
As a result of the COVID virus, President Trump issued major disaster declarations for each of the 50 states, the District of Columbia, and five U.S. territories. The IRS notice provides guidance on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the ongoing COVID-19 pandemic in the affected geographic areas.
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 charitable organizations described in Internal Revenue Code (IRC) section 170(c.) Contributions made to a domestic public charity that is qualified under IRC section 501(c)(3), or made to a state or possession of the United States and the District of Columbia for public purposes all qualify under IRC section 170(c.)
The notice provides that if the payments are (1) made to IRC section 170(c) organizations for the relief of victims of the COVID-19 pandemic in the affected disaster relief areas and (2) are paid to the organizations before January 1, 2021, then the cash payments will not be treated as wages (or compensation, as applicable) to the employees or otherwise be included in the gross income of the employees. The electing employees may not claim a charitable contribution deduction with respect to the value of forgone leave. The employer may deduct the cash payments under the rules of IRC section 170 or the rules of IRC section 162 (deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business) if the employer otherwise meets the respective requirements of either section.
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