When your business is faced with a volatile or unpredictable situation, you naturally want to support your employees in the best way you can. Understanding all your options, including some new tax law benefits and implications, can help you identify the most appropriate solution.
Emergency Declaration
On March 13th, President Trump’s national emergency declaration triggered Section 139 of the tax code, which now authorizes employers to distribute funds directly to employees for reasonable and necessary expenses resulting from the coronavirus pandemic including: personal, family, living, or funeral expenses. All such payments are tax-deductible for the employer and tax free for the employee.
Charitable Organizations
In addition to direct payments, employers can create charitable organizations[1] to assist employees. These organizations may be formed to provide relief from a specific, federally declared disaster, like COVID-19, or function more broadly to address individual hardships that may arise within your employee population. All amounts received by the employee would be tax free. As an employer, you would receive a charitable deduction (subject to the usual limits on deductibility) for amounts contributed to the charity.
Additional Benefits under the CARES Act
Deductions taken for providing employee relief may also provide you with additional tax benefits such as net operating losses (NOLs) which can be used to offset income in future years. Also, provisions of the CARES Act (the Act), enacted in response to the Coronavirus Emergency, provide employers with the ability to use net operating losses generated in 2020 to offset income from past, perhaps more profitable, years. The Act states:
- NOLs from 2018, 2019, and 2020 can be carried back 5 years. Corporate taxpayers with eligible NOLs may now be able to claim a refund for tax returns from prior tax years.
- NOLs prior to January 1, 2021, can now fully offset a company’s taxable income during this five-year period.
- The Act temporarily removes limitations on NOL offset established by the 2017 Tax Cuts and Jobs Act (TCJA) and temporarily allows NOLs to be carried back five years.
- If it would produce a better result, the carryback can still be waived, allowing the NOL to be carried forward only to subsequent tax years.
Donation of Personal Leave Time
On June 11th, the IRS published Notice 2020-46, which provides tax relief for employees who forego personal leave time in exchange for an employer contributing that value to an Employee Assistance Fund, so long as the payments: (1) provide relief to victims of the Covid-19 pandemic and (2) are paid to the charitable organization before January 1, 2021. Under this notice, the donated PTO is no longer recognized as gross income or wages for employer or the employee donor. Meanwhile, the donated PTO value may still be deductible for the employer under Internal Revenue Code Section 170 or 162.[2]
Options for Providing Employee Assistance Programs
| Direct Payments | Donor Advised Fund | Private Foundation | Public Charity | |
| Description | Employer distributes funds directly to employees or members of employees’ families to reimburse or pay certain reasonable and necessary expenses incurred as a result of a qualified disaster | Employer sponsors a separate fund within a 501(c)(3) public charity that offers donor advised funds. An independent committee advises the fund to distribute funds to employees or members of employees’ families to reimburse or pay certain expenses resulting from a qualified disaster | Employer creates a trust or corporation that qualifies as a 501(c)(3) private foundation. An independent committee distributes funds to employees or members of employees’ families to reimburse or pay certain expenses resulting from a qualified disaster | Employer creates a trust or corporation that qualifies as a 501(c)(3) public charity. An independent committee distributes funds to employees or members of employees’ families to reimburse or pay certain expenses resulting from a qualified disaster or to assist in certain hardships |
| Governing Internal Revenue Code Provisions | Section 139 | Sections 501(c)(3), 170, 102, 139 | Section 501(c)(3), 170, 102, 139 | Section 501(c)(3), 170, 102 |
| Eligible Donors | Employer | Employer, employees and others | Employer, employees and others | Employer, employees and others |
| Eligible Recipients | Employees and their family members | Employees and their family members, except disqualified persons[3] | Employees and their family members except disqualified persons[4] | Employees and their family members except disqualified persons[5] |
| Limitations on Grant Size | Reasonable & necessary: (i) personal, family, living, or funeral expenses (ii) expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents if attributable to or incurred as a result of a qualified disaster |
Reasonable & necessary: (i) personal, family, living, or funeral expenses (ii) expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents if attributable to or incurred as a result of a qualified disaster |
Reasonable & necessary: (i) personal, family, living, or funeral expenses (ii) expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents if attributable to or incurred as a result of a qualified disaster |
For disaster relief and other employee hardships based on objective standards of need |
| Time Limitation on Eligibility | Requires a federally declared disaster | Requires a federally declared disaster | Requires a federally declared disaster | Requires an employee to suffer a hardship |
| Tax Benefit to a Corporation taxed under IRC Subchapter C | Unlimited deductibility | Deductible up to 10% of taxable income (with certain modifications); excess deductions may be used in the next 5 years | Deductible up to 10% of taxable income (with certain modifications); excess deductions may be used in the next 5 years | Deductible up to 10% of taxable income (with certain modifications); excess deductions may be used in the next 5 years |
| Tax Benefits to Pass Through Entities (taxed under IRC Subchapter S or K) | Reduction of income (possible increase in loss) passed through to owners | Charitable deduction passes through to owners | Charitable deduction passes through to owners | Charitable deduction passes through to owners |
| Tax Benefit to Individual Donor | Reduction of income (possible increase in loss) passed through to owners | Yes, subject to IRC Sec. 170 limitations; Taxpayers who do not itemize may be limited to $300 above the line deduction for cash gifts (IRC Sec. 62(a)(22)) | Yes, subject to IRC Sec. 170 limitations; Taxpayers who do not itemize may be limited to $300 above the line deduction for cash gifts (IRC Sec. 62(a)(22)) | Yes, subject to IRC Sec. 170 limitations; Taxpayers who do not itemize may be limited to $300 above the line deduction for cash gifts (IRC Sec. 62(a)(22)) |
| Who controls grant making organization? | Grants made directly from Employer; Employer is controlled by its board of directors, general partners or other governing structure | Donor Advised Fund controlled by the Board of Trustees or Board of Directors of the Public Charity sponsoring the Donor Advised Fund | Private Foundation controlled by its Board of Trustees or Board of Directors | Public Charity controlled by its Board of Trustees or Board of Directors (the “Board”). The Board must be independent from control by the Employer |
