Under a leave-sharing program, employees can elect to forgo vacation, sick or personal leave in exchange for cash payments made by their employers to qualifying charitable organizations. These arrangements have been around for a while, but they’ve gotten more attention in recent years as some employers have launched leave-sharing programs to aid those adversely affected by the COVID-19 pandemic and other disasters.
Recently, in Notice 2022-28, the IRS announced special tax relief for leave-based donation programs set up to aid victims of the “further Russian invasion of Ukraine,” which began on February 24, 2022. Here are some pertinent details.
Tax issues addressed
Ordinarily, leave-based charitable donations must be included in a donating employee’s income. In addition, the opportunity to elect such contributions usually raises the concern that eligible employees might be taxed on income that could’ve been donated because the ability to make a donation triggers “constructive receipt.”
Like similar recent guidance, such as IRS Notice 2021-42 issued last June, this latest notice addresses both tax issues. First, cash payments that employers make to qualified tax-exempt organizations in exchange for vacation, sick or personal leave that their employees elect to forgo won’t constitute income to the employees if the payments are made before January 1, 2023, for the relief of victims of the further Russian invasion of Ukraine. Such payments need not be included in Box 1, 3 or 5 of the employee’s Form W-2.
Second, the mere opportunity to make a leave donation won’t result in constructive receipt of income for employees. Electing employees may not deduct the value of the donated leave on their income tax returns. Such deductions would be “double-dipping” because the donated leave will have already been excluded from their income.
Employers will be permitted to deduct the contributions as either charitable contributions or as trade or business expenses so long as the applicable requirements are met.
Easy and efficient
A leave-sharing program can allow employees to make charitable donations in a relatively easy, efficient manner.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.