{"id":3514,"date":"2020-04-10T15:54:05","date_gmt":"2020-04-10T15:54:05","guid":{"rendered":"https:\/\/patellawoffices.com\/blog\/?p=3514"},"modified":"2020-04-10T15:54:09","modified_gmt":"2020-04-10T15:54:09","slug":"tax-free-disaster-relief-payment-program","status":"publish","type":"post","link":"https:\/\/patellawoffices.com\/blog\/planning-for-tax-minimization\/tax-free-disaster-relief-payment-program\/","title":{"rendered":"Tax-free Disaster Relief Payment Program"},"content":{"rendered":"\n<p>In response to the ongoing pandemic, on March 13, 2020, President Trump declared the coronavirus or COVID-19 as a national disaster. This declaration activates a little-known\u00a0<em>existing\u00a0<\/em>provision of the tax law: Section 139 of the Internal Revenue Code. Section 139 allows employers to assist employees during a federally declared disaster with \u201cqualified disaster relief payments\u201d that are <strong>tax-free<\/strong> to the employee and fully <strong>deductible <\/strong>to the employer. <\/p>\n\n\n\n<p>We have been helping our clients wishing to aid employees impacted by COVID-19 to adopt a Section 139 program to help their employees through these difficult times.<\/p>\n\n\n\n<p><strong><em>Background &nbsp;<\/em><\/strong><\/p>\n\n\n\n<p>Added to the Internal Revenue Code after the September\n11, 2001 attacks, Section 139 allows employers to make tax-free deductible \u201cqualified\ndisaster relief payments\u201d to help employees in the wake of a qualified\ndisaster. Section 139 is important because typically any payment from an\nemployer to an employee, even a gift, is taxed to the employee as compensation.\nSection 139, however, provides that any amount received as a \u201cqualified\ndisaster relief payment\u201d cannot be taxed to the employee as income. These payments\nare not subject to any federal withholding obligations and do not need to be\nreported on a Form W-2 or 1099. Any amounts paid as a \u201cqualified disaster\nrelief payment\u201d are also deductible by the employer. In addition, in most\ncases, the exclusion will also apply for state income tax purposes.<\/p>\n\n\n\n<p>A \u201cqualified disaster relief payment\u201d under\nSection 139 includes payments by an employer, not compensated for by insurance\nor otherwise, paid to or for the benefit for its employees to:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>reimburse or pay\nreasonable and necessary personal, family, living, or funeral expenses incurred\nas a result of a qualified disaster; and<\/li><li>reimburse or pay\nreasonable and necessary expenses incurred for the repair or rehabilitation of\na personal residence or repair or replacement of its contents to the extent\nthat the need for such repair, rehabilitation, or replacement is attributable\nto a qualified disaster.<\/li><\/ul>\n\n\n\n<p><strong><em>Examples of COVID-19\n\u201cReasonable and Necessary Expenses\u201d<\/em><\/strong><\/p>\n\n\n\n<p>Section 139 has been utilized in the past for\nother Stafford Act disasters, and it was clear that during a natural disaster,\nlike Hurricane Katrina, employer expenses paid to employees related to property\nrepair and replacement, temporary housing, and food would be covered. However,\nthe situation with COVID-19 is unique in that Section 139 has yet to be invoked\nfor a disease pandemic. The IRS has not issued any guidance specific to\nCOVID-19 and thus it is not entirely clear what types of expenses during this\ntime will be considered \u201cqualified disaster relief payments.\u201d<\/p>\n\n\n\n<p>Nevertheless, legislative history and a\nreasonable interpretation of the statutory text provides that the following\npayments or reimbursements from employer to employee should qualify under\nSection 139 provided the expenses are reasonable and necessary, relate to the\nCOVID-19 pandemic, and are not otherwise compensated by insurance:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Medical expenses of\nthe employee not covered by insurance or otherwise (i.e. copays incurred for\nCOVID-19 treatment, deductibles, over-the-counter medicines and cleaning\nsupplies);<\/li><li>Health-related\nexpenses other than medical expenses (i.e. over-the-counter medications used to\ntreat COVID-19);<\/li><li>Dependent care\nexpenses, such as child care or tutoring expenses for an employee\u2019s dependent\ndue to school closures; remote learning or home schooling expenses, such as home\ninternet, computer for use by a dependent, educational materials, subscriptions\nto online educational resources, etc.;<\/li><li>Expenses associated\nwith working from home, including home office set-up costs, computer, internet,\nprinter, and cell phone costs, and even increased utility costs on account of\nthe home office;<\/li><li>Transportation\nexpenses due to work relocation including costs associated with taking a taxi\nor ride-sharing app service from home due to mass public transport closures;<\/li><li>Critical care and\nfuneral expenses of an employee or a member of the employee\u2019s family, who dies\nfrom a COVID-19 infection; and<\/li><li>Other living expenses\ndue to an employee\u2019s know exposure to COVID-19 such as hand sanitizers and home\ndisinfectant supplies.<\/li><\/ul>\n\n\n\n<p>Specifically excluded from \u201cQualified disaster\nrelief payments\u201d are payments for nonessential, luxury, or decorative items or\nservices, and wage replacement payments such as sick pay, family medical leave\npay, or any other type of salary or leave pay. <\/p>\n\n\n\n<p><strong><em>Employer\nConsiderations&nbsp;<\/em><\/strong><\/p>\n\n\n\n<p>Section 139 does not require an employer to\nhave a written policy or program for \u201cqualified disaster relief payments\u201d,\nhowever, employers who wish to make \u201cqualified disaster relief payments\u201d due to\nCOVID-19 should ideally a written policy or program to inform employees of the availability\nand parameters of such a payment program.<\/p>\n\n\n\n<p>Any policy adopted by an employer in response\nto Section 139 should clearly document the features of the program, including\nthe following:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>a description of who\nis an eligible employee;<\/li><li>a listing of expenses\nthat that will be subject to reimbursement or payment;<\/li><li>a per-employee\nallowance for reasonable expenses (i.e., $500 per month);<\/li><li>the method for\nreimbursement\/payment<\/li><li>the start and end date\nof the program.<\/li><\/ul>\n\n\n\n<p>Payments are not required to be reported on a Form W-2 or Form\n1099, and there is no specific limit on the amount of reimbursement that may be\nmade to an employee, other than the requirement that the expense be reasonable\nand necessary. Employers do not need to collect receipts or other proof of\nexpenses incurred by employees. <\/p>\n\n\n\n<p><strong><em>Conclusion<\/em><\/strong><\/p>\n\n\n\n<p>In light of the\nexigency and uncertainty caused by the COVID-19 pandemic, employers should look\nto Section 139 as a favorable and efficient mechanism to provide tax-free deductible\nsupplemental assistance to employees. Section 139, which is a little-known oldtax\nprovision, may be the best and easiest way for employers to assist their\nemployees during these uncertain times.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In response to the ongoing pandemic, on March 13, 2020, President Trump declared the coronavirus or COVID-19 as a national disaster. This declaration activates a little-known\u00a0existing\u00a0provision of the tax law: Section 139 of the Internal Revenue Code. Section 139 allows employers to assist employees during a federally declared disaster with \u201cqualified disaster relief payments\u201d that [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3514","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3514","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=3514"}],"version-history":[{"count":1,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3514\/revisions"}],"predecessor-version":[{"id":3518,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3514\/revisions\/3518"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=3514"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=3514"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=3514"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}