Understanding Qualified Disaster Relief Payments
Filed under:Tax Advisory: U.S. Federal
Business owners and employees alike have endured possibly the most stressful year of their careers thus far. With the end of 2020 fast approaching, we are focused on identifying tax strategies for our business owners to take advantage of. A tax strategy that likely has not been considered for several years has come to life again in 2020 and provides a unique opportunity.
Internal Revenue Code (IRC) Section 139 outlines the payment of qualified relief payments to employees during a federally declared disaster. The tax provision received attention for being an important tool for businesses during the Hurricane Katrina disaster.
On March 13, 2020, President Trump declared COVID-19 a Federal disaster in all 50 states. As a result, the door has been opened to utilize the opportunity that §139 provides.
What is IRC Section 139?
IRC Section 139 allows an employer to make qualified disaster relief payments to employees for costs they incurred as a result of the declared disaster. The payments made to employees are not reported on their W-2 and are not subject to income tax withholding, FICA or FUTA payroll taxes. Additionally, the employer is allowed to fully deduct the relief payments and is also not subject to tax on these payments.
What payments qualify for IRC Section 139?
During the COVID-19 pandemic many employees have transitioned to work from home or to modified work schedules, which has had a ripple effect on their usual routine. Employers can make a qualified relief payment to assist their employees’ transition to their new work expectations and other accommodations. To qualify, the expense simply must be incurred as a result of the COVID-19 pandemic. Some common permissible expenses include: equipment necessary to work from home, increased cost of internet, increase in day care expenses, funeral expenses, and personal protective equipment.
What else should you know?
Employers who make disaster related payments can provide a lump sum payment that reasonably estimates the amount of expenses the employee has incurred. The employer is not required to maintain itemized receipt documentation for how the employee utilizes the relief payment.
If your business and employees were impacted by the COVID-19 pandemic you should consider utilizing a IRC Section 139 qualified disaster relief payment for your employees. Contact your tax professional to talk about this opportunity in more detail.