Coronavirus Tax Relief: Treatment of amounts paid to Section 170 (c) organizations under employer leave-based donation programs to aid victims of the COVID-19 pandemic
July 29, 2021
Dickinson Wright PLLC
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The Treasury Department and the Internal Revenue Service have extended the treatment provided in Notice 2020-46 to include vacation-based donation programs and cash payments in connection with such programs made after December 31, 2020 to Section 170 (c) organizations and before December 31, 2020 January 1, 2022. See Communication 2021-42.
According to Notice 2020-46, as amended by Notice 2021-42, once employers have implemented vacation-based donation programs, employees can choose to forego vacation, sickness, or personal vacation in exchange for cash payments made by the employer to nonprofits, such as described in Section 170 (c) of the Code (Section 170 (c) Organizations). Cash payments made by an employer to Section 170 (c) organizations in return for vacation, sickness, or personal vacation waived by its employees will not be treated as employee compensation or otherwise included in employees’ gross earnings if the payments are:
- to the organizations under Section 170 (c) in support of victims of the COVID-19 pandemic; and
- paid to the organizations under Section 170 (c) prior to January 1, 2022.
Employees who forego vacation are not treated as if they actually received gross income or wages. The amount of cash payments to which these guidelines apply should not be reported in box 1, 3 (if applicable) or 5 of Form W-2. In addition, employees cannot claim a deduction of contributions according to § 170 on the value of the lost vacation. Only the employer may deduct these cash payments according to § 170 or § 162 rules, if the employer otherwise meets the respective requirements of one of the two sections.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
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