As the pandemic moves into a new phase and businesses and offices are starting to resume normal operations, it may be time to revisit Internal Revenue Code (the Code) Section 139, an underutilized and often overlooked Code Section. It is an opportunity for businesses to reimburse individuals for prior and ongoing “Qualified Disaster Relief Payments” on an income tax-free basis.
A “qualified disaster relief payment” as defined by Section 139(b) of the Code includes, in part, any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. These payments do not include wages paid to an employee, even while not providing services.
The origin of Section 139 stems from the 9/11 terrorist attacks. Previously, any payments to employees in need would be considered taxable wages and subject to employment taxes. Section 139, however, provided that any amount received as a “qualified disaster relief payment” cannot be taxed to the employee as income. There is no need to report these payments on Form W-2 or 1099. This treatment, in most cases, would also apply for state income tax purposes.
On March 13, 2020, President Trump declared COVID-19 a national disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This determination was for all 50 states, the District of Columbia, and all U.S. Territories. To date, President Biden has not lifted the disaster designation, therefore, the provisions of IRC Section 139 are still in effect, providing businesses with an effective tax-free way to reimburse employees as they transition back to work or continue working remotely. It allows businesses the ability to structure their own plans of reimbursement for prior expenses and future costs.
The language used in Section 139 is not specific and there have not been regulations or additional guidance given. Therefore, even an informal written disaster relief plan, although not required, would be advisable. Included in the plan at the least should be employee eligibility requirements, as participation can be restricted, types and limits of “qualified disaster relief payments” as defined by Section 139(b) of the Code that are not reimbursed by insurance, and start and end dates of the plan. IRC Section 139 does not require receipts of any type from the employee, and it is the employee’s responsibility to justify the expense. However, it is advisable to require some type of written itemization of expenses from the employee. Employers can deduct these payments as ordinary and necessary business expenses. However, payments that would create a double benefit such as payments to an owner–employee would not be included.
A “Qualified disaster relief payment” as defined by IRC Section 139(b) is:
- To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses not reimbursed by insurance
- To reimburse or pay reasonable and necessary expenses for the repair of a personal residence or replacement of the contents
- By a person acting as a common carrier by reason of death or personal injury from the disaster
- By a federal, state, or local government or agency or instrumentality in connection with a qualified disaster to promote general welfare
Specific guidance has not been given as to reimbursable expenses in a pandemic as opposed to a disaster. The following would indicate some examples of eligible expense categories and is not to be meant to be all inclusive:
- Grocery delivery
- Additional living expenses
- Caregiver costs
- Domestic services
- Costs of quarantine
- Medical and hygienic expenses not covered by health insurance
- Childcare expenses, tutoring, or homeschooling expenses
- Expenses incurred to allow work from home such as the cost of a personal computer, printer, supplies, internet service, telephone service, postage, messenger service, housekeeping, etc.
- Commuting expenses
- Funeral expenses
- Professional fees
Any business considering offering disaster relief payments is encouraged to consult with a Withum tax advisor who will assist in the proper structuring and implementation of the plan.