Many employers have adopted or may be considering adopting PTO (paid time off) donation programs. Under these programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash value that their employer then donates in their name to charitable organizations.
In response to the need to provide relief to victims of the COVID-19 pandemic, donations of unused vacation / PTO employees make to relief organizations specifically serving those affected by COVID-19 will not be considered taxable compensation, according to a new ruling by the IRS (Notice 2020-46).
Normally, organizations can facilitate donations of employee unused PTO to any certified nonprofit, which most recently numbered over 1.2 million in the US. In these standard cases, the value of donated PTO is considered compensation and subject to normal tax withholding and treatment for the donating individual.
For example, if an employee has an hourly pay rate of $40/hr and donates 1 day to a certified 501(3)(c) charity, the total gross donation amount would be $320 (8 hrs * $40/hr). This $320 would be considered taxable compensation and additional tax withholding (at the employee’s normal withholding rate) would be reflected on the employee’s next paycheck, in addition to an 8 hour reduction of accrued PTO. Given this is considered an after-tax donation, employees can deduct this contribution on their tax returns.
Under Notice 2020-46, the IRS is essentially carving out certain, specific nonprofit organizations (Section 170(c) organizations) that are providing relief services to those affected by COVID-19 for favorable tax treatment. If employees donate unused vacation / PTO to these Section 170(c) organizations, this donation is NOT considered taxable compensation and hence NOT subject to tax withholding by the donating employee. So the employee saves by avoiding taxes, which is the incentive the IRS has put in place to encourage giving to these specific relief organizations. Also, since this is not an after-tax contribution, the employee cannot deduct the value of the contribution on their tax returns.
Treatment of Employer Leave-Based Donation Payments
Specifically, IRS Notice 2020-46 says: “Cash payments an employer makes to section 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo will not be treated as wages (or compensation, as applicable) to the employees or otherwise be included in the gross income of the employees if the payments are:
- made to the section 170(c) organizations for the relief of victims of the COVID-19 pandemic in the affected geographic areas; and
- paid to the section 170(c) organizations before January 1, 2021.
Similarly, employees electing to forgo leave will not be treated as having constructively received gross income or wages (or compensation, as applicable). Electing employees may not claim a charitable contribution deduction under section 170 with respect to the value of forgone leave.”
What is a Section 170c Organization?
One of the operative words in this ruling is “section 170(c) organization.” If an employee donates to one of these organizations, their donation qualifies as a tax-exempt donation.
But what on earth is a “section 170(c)” organization?
Basically, section 170(c) organizations are organizations that can receive contributions or gifts for specific charitable or public purposes. “Section 170(c)” refers to section 170(c) of the IRS Tax Code.
Section 170(c) provides for charitable contributions to 5 categories of organizations:
- Public entity - a political subdivision of the US, as long as the contribution is made exclusively for public purposes;
- A corporation, trust, community chest, or foundation - that is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals;
- A trust, foundation, or organization of war veterans;
- A domestic fraternal society, order, or association (with the caveat the contributions be used exclusively for religious, charitable, scientific, literary, or educational purposes);
- Cemetery companies owned and operated exclusively for the benefit of its members.
See the official Section 170 tax code for reference.
What's the Difference Between a 501(c)(3) Organization and a Section 170(c) Organization?
All of the 501(c) sections, including 501(c)(3), describe particular types of organizations that qualify for tax exemption. Section 170(c) provides that contributions to certain types of organizations—primarily 501(c)(3)s and others where the contribution or gift meet specific criteria — are deductible by the donor as itemized deductions. Section 501(c)(3) governs tax exemption of organizations, while section 170 governs deductibility of contributions by individuals.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.
Top COVID-19 Charities
A number of highly-rated charities have created funds to support communities around the world affected by the outbreak. Here are some examples of nonprofits specifically related to COVID-19 relief.
Center for Disaster Philanthropy
Center for Disaster Philanthropy (CDP) launched the CDP COVID-19 Response Fund to support containment, response and recovery activities for those most affected and for the responders.
CDC Foundation
The CDC Foundation is an independent nonprofit and the sole entity created by Congress to mobilize philanthropic and private-sector resources to support the Centers for Disease Control and Prevention’s critical health protection work.
World Vision
Coronavirus Emergency Response - helping vulnerable children worldwide who are fighting “secondary effects” of COVID-19 by providing life-saving food, child protection programs, educational support, and more. You will also help limit the spread of the virus both abroad and here in the US.
Catholic Charities
Catholic Charities agencies are on the frontlines during the COVID-19 pandemic, distributing food, offering shelter, providing health and wellness support and so much more.
American Red Cross
The American Red Cross shelters, feeds and provides emotional support to victims of disasters; supplies about 40 percent of the nation's blood; teaches skills that save lives; provides international humanitarian aid; and supports military members and their families.
Here’s a list of recommended nonprofits providing much-needed COVID-19 relief services. These service organizations span across the following categories:
- Medical Services - Partnering with medical teams to combat COVID-19
- Relief Supplies: Health & Medical - Providing much-needed medical supplies to hospitals and health facilities
- Cross-Category - Providing much-needed assistance across multiple areas
- Funding Local Organizations - Partnering with local organizations to ensure communities across the country have the resources and support they need
- Education & Awareness - Raising awareness of ways to prevent COVID-19 and how to cope with the stress it's causing
- Relief Supplies: Community Support & Services - Supporting the safety nets of our society and protecting the most vulnerable
Growing Interest in PTO Donation Plans
PTO Exchange has developed a flexible benefits platform that allows and facilitates donations to charitable organization as well as sharing of PTO amongst employees who need it most. Leave-sharing is one aspect of our platform that can be turned on expeditiously, as quickly as 24 hours, if the need arises.
This is a notable time with many companies making bold adjustments to their PTO strategy and trying to find new ways to help their employee community bridge the changes that are affecting their lives.
If PTO donations or leave-sharing is something that can help your organization navigate through this situation, we are here to help.
To learn more, download our free ebook, "12 Things You Need to Know About Setting Up a COVID-19 Leave-Sharing Plan."
Published on Jun 23, 2020 by Gregg Makuch
