IRS Ruling Creates Potential Win-Win for Employees

Many companies have established leave-sharing plans, which allow employees to donate accrued leave time for use by others in the company.  In general, the employee who donates the time will report that paid time off (PTO) as taxable compensation on their W-2.  However, there are exceptions to the rule – including disaster provisions that are applicable during the current pandemic conditions.

IRS Notice 2006-28 details the exception – a change in treatment of leave time donations during a time of disaster – and it creates a potential win-win for employees.  In this case, an employee who foregoes their leave time will not report this time as taxable income, which means surplus accrued time off can be shared without the tax burden on those wages.

In addition, the emergency declaration (issued March 13, 2020) includes IRS Notice 2020-46, which provides guidance for employers on how to use funds from leave programs to make donations to charitable organizations described in section 170(c) of the Code.  The intent is to provide support to organizations assisting victims of the COVID-19 pandemic.  Using funds from a leave-sharing plan allows many employees of an entity to pool together funds to support those in need.

For company leadership, this provides an opportunity to help their surrounding communities during a time of need.  They’re not only in a position to lead the decision, but also to inspire others within the organization to share accrued time. If this is a call to action that speaks to you, know that the deadline for the declaration is for contributions made by December 31, 2020.

Have a question about the tax implications of leave-sharing plans and donations? The experts at Barnes Dennig can help – contact us to learn more about how you can help your community and reduce your tax burden.