As the impact of the Coronavirus pandemic continues to grow some businesses may be inclined to provide additional assistance to their employees on top of the current relief bills, especially in cases where businesses have shifted to a remote workforce. There may be a way to provide such assistance while doing so in a tax efficient way. When the President declared a national emergency, the door to Internal Revenue Code Section 139 was opened.
Section 139 allows "qualified disaster relief payments" to be excluded from employees’ taxable wages which includes amounts paid for "reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster." Employers are also allowed to deduct payments under Section 139 as a normal business expense.
Usually, Section 139 is applied in the context of a natural disaster in which property needs to be repaired or replaced, or people need to find temporary housing while they are unable to use their residences. All of those types of expenses are clearly covered by Section 139. The Coronavirus pandemic is causing different types of economic damages, including increased medical and child care expenses as a result of schools being closed, expenses for setting up home office, increased expenses related to obtaining normal living items etc. To the extent that an employee incurs additional reasonable and necessary personal, family, or living expenses as a result of the disaster, they would qualify under Section 139. It’s also important to remember that Section 139 doesn’t apply to any expenses that are reimbursed, such as by insurance or to normal living expenses (such as mortgage payments, utilities, or food). Types of expenses that may qualify as additional reasonable and necessary personal, family or living expenses as a result of the Coronavirus may be:
- Over-the-counter medications, hand sanitizer and home disinfectant supplies.
- Child care or tutoring due to school closings.
- Work-from-home expenses such as setting up a home office, increased utilities expenses and higher Internet costs.
- Increased commuting costs, such as taking a taxi instead of using public mass transit.
- Unreimbursed health-related expenses.
Section 139 does not impose any limit on the amount or frequency of qualified disaster payments nor are employees required to provide receipts or other proof supporting their expenses, provided that the amount of the payments can be reasonably expected to commensurate with the expenses incurred.
It is recommended that the employer have a written qualified disaster relief payment plan along with other documentation, which would include:
- The amounts paid and to whom;
- The start and end date of the program;
- A general listing of the expenses that will be paid or reimbursed on behalf of the employees, and;
- The maximum amount the employer will pay per-employee or in the aggregate.
Payments for lost wages are not covered under Section 139.
Please consult your tax advisor or attorney for more information if you are interested in learning more about disaster relief payments to employees.