On June 30, 2021, the IRS announced via IRS Notice 2021-42, a one-year extension to the special federal income and employment tax treatment/relief for leave-based donation programs aiding victims of the COVID-19 pandemic. Leave-based donation programs allow employees to forgo their accrued leaves (vacation, sick, personal leave, etc.) in exchange for cash payments from the employer to charitable organizations. Usually, these donations would still have to be included as part of the employee’s income for tax purposes. Last year, the IRS provided relief from this tax issue via IRS Notice 2020-46, which also provided that employees electing to forgo leave would not be treated as having constructively received gross income or wages.
IRS Notice 2021-42 extends this tax relief from January 1, 2021, through December 31, 2021, regarding cash payments made to charitable organizations described in section 170(c) and that provide COVID-19 relief. Employees, however, cannot claim a deduction for the leave that they donated to their employer. Although an employer may deduct these cash donation payments under Internal Revenue Code sections 162 or 170 if they meet the requirements of either section. For example, the cash contributions must be to a qualifying organization, such as a non-profit or religious organization.
Especially for those employers who have already established such leave-based donation programs, the IRS’s announcement provides confirmation that the favorable tax treatment of leave-based donations can continue, at least through 2021.