It is interesting to note that long before anyone could have ever anticipated the current health and economic crisis we are facing today, a provision was included in the tax code under IRC Section 139 (a) that could be very beneficial for certain taxpayers during the COVID-19 crisis!
When President Trump issued the emergency declaration on March 13, 2020, declaring COVID-19 as a national emergency under the Stafford Act., provisions of Section 139 became applicable. The relevant question is what constitutes a “qualified disaster relief payment.”
Understanding Section 139 (a)
Under IRC Section 139(a), an employer that provides a qualifying disaster relief payment is not required to include such amount as wages (or as self-employment earnings). Although these payments are tax-free for federal tax purposes to the employees (not subject to FICA, FUTA, FIT OR FITW), they are fully deductible to the employer.
Whether any particular payment is considered a “qualifying disaster relief payment” will be a factual determination. The facts that will determine the answer to this question touch on several areas:
- “Qualified disaster relief payments” under Section 139, are payments to the employees that are either:
- to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; or
- to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster
- The payments will qualify as qualified disaster relief payments and be tax-free only to the extent that any expense compensated by such payment is not reimbursed by insurance or other sources such as income replacement for lost wages or other hardship assistance.
What does not qualify as a qualified relief payment?
Payments are not considered Section 139 payments, if they are intended to replace lost income, such as sick pay or family medical leave payments.
For example, if a restaurant is closed, and voluntarily continues to pay wages, it does not appear to satisfy the statutory standard. While that fact pattern undoubtedly is a result of hardship, the standard is whether expenses are incurred as a result of the disaster.
On the other hand, if an employee is teleworking and must incur new expenses, such as childcare because of school closures, then such expense likely does meet the qualifying disaster relief definition, and is not taxable to the employee.
Section 139 does not require employees to achieve a certain period of service to be eligible to receive tax-free payments under this provision, and the employer is not required to have a formal plan or documentation for such payments. Employers are however, encouraged to document:
- Their intention for such payments
- A general listing of the expenses that are being reimbursed
- A list of the payees and amounts paid to each
Whether you are an employer or an employee, if you have any questions about how Section 139 can affect you, please feel free to call or email us! We look forward to helping you.
