By: Bryan Davidson, CPA- Tax Manager
No, we are not talking about government payments to businesses or individuals. Under IRC Sec. 139 an employer can deduct disaster relief payments to employees without the employee including the payments in income. IRC Sec. 139 applies when the President declares a “disaster” within the meaning of IRC Sec. 165(i). Revenue Ruling 2003-29 defines a disaster as an event declared a major disaster or an emergency under the Stafford Act. On March 13, 2020, President Trump made an emergency declaration, so these provisions apply.
An employer that makes a qualifying disaster relief payment is not required to include those amounts as wages to the employee. With the nation currently in the middle of the Covid-19 pandemic disaster relief payments may be an option in parts of the country that have never experiences disasters before. Payments that qualify are paid to employees to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster. These expenses are also not covered or reimbursed by insurance. Current guidance states voluntarily continuing wages when a business is closed would not satisfy the statutory standard. The relief payments and guidance are designed to cover additional expenses as a result of the disaster. Examples of expenses are:
- 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 repair/replacement of its contents to the extent that the need for such repair/replacement is attributable to a qualified disaster
- 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, or
- If such amount is 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.
It is not specifically required in IRC Sec. 139 or any other guidance, but it would be good practice that employers who assist employees with disaster relief payments have a written document that outlines the parameters of the program. This outline should specify the details such as the disaster to which the relief relates, types of expenses covered and maximum reimbursement available. If you are considering these types of payments to employees or having further questions, please contact us. We are here to assist.