Qualified Disaster Relief Payments in the Wake of Hurricanes Harvey and Irma
The extensive damage and suffering caused by Hurricanes Harvey and Irma have caused charitable organizations, employers, labor unions, associations and all Americans to want to provide needed financial assistance to all of those affected, including employees and union members.
While the relief of suffering is, of course, the primary concern, all organizations should take into account the provisions of Internal Revenue Code (IRC) Section 139, providing for the tax-free treatment to the recipient, including employees, of payments made and deductibility from income by businesses making payments to their employees.
IRC Section 139 provides that an individual’s gross income does not include any amounts received as a qualified disaster relief payment. A qualified disaster is defined as any of the following:
- A disaster which results from a terroristic or military action.
- A federally declared disaster.
- A disaster which results from an accident involving a common carrier, or from any other event, which is determined by the Secretary of the Treasury to be of a catastrophic nature.
- A disaster which results in payments by federal, state or local governments or their agencies or instrumentalities (with respect to payments not otherwise compensated for by insurance or otherwise).
Qualified disaster relief payments are defined as amounts paid for the benefit of an individual made for any of the following expenses:
- To reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster.
- To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or the repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster.
- Paid by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster.
- Paid by a federal, state or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.
Qualified disaster relief payments do not include income replacement payments, including lost wages, income to an independent contractor and unemployment benefits nor may they include payments compensated by insurance. Because these payments are not included in the recipients’ income, the qualified disaster relief definition is a good standard for all organizations to use. Qualified disaster relief payments made to employees are also not subject to payroll taxes.
Existing charitable organizations should consider following the rules of IRC Section 139 with respect to payments made to both employees and individual grantees and must maintain appropriate documentation. Employer-sponsored private foundations, for which the employer is a disqualified person, may make payments to employees of the corporation provided that the payments are made in response to a “qualified disaster,” and that the payments are consistent with the foundation’s charitable purpose. To be consistent with the foundation’s charitable purpose, the following requirements must be met:
- The class of beneficiaries is large or indefinite – a charitable class, which for purposes of a corporate foundation, must be indefinite and apply to both current and future disasters.
- The recipients are selected based on objective determinations of need.
- The selection is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The foundation’s selection committee is independent if a majority of the members of the committee are persons who are not in a position to exercise substantial influence over the affairs of the employer.
Payments made by corporate foundations, meeting the tests above and the requirements of IRC Section 139 will not result in income to corporate employees. Note: corporations with employer-sponsored private foundations should consider making “qualified disaster relief payments” directly due to the lack of a charitable contribution deduction limitation for the direct payments.
Note that all charitable organizations soliciting money from the general public are responsible for meeting applicable state charitable registration requirements.
For additional guidance, refer to IRS Pub 3833 using this link.
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