IRC Section 139 – Benefits for You and Your Employees in a “Disaster”

On March 13, 2020, President Trump issued a declaration, under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, to declare the COVID-19 pandemic a federal disaster.  As a result of this declaration, employers are able to make payments to their employees that qualify as disaster mitigation relief payments. These payments will not be taxable to the individual receiving them and will remain deductible to the employer making the payments.

After September 11, 2001 a new statute, I.R.C. Section 139, was added to the Tax Code.  This code section was designed to allow individuals to receive tax free payments during qualified disasters.  A qualified disaster is defined as a disaster which results from a terroristic or military action, a federally declared disaster, or an event that is determined to be of catastrophic nature by the Secretary of Treasury.

Excludable qualified disaster relief payments include the following payments to or on behalf of an individual from any source, to the extent that expenses are not compensated for by insurance or otherwise:

  • payments to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the disaster;
  • payments 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 such needs are attributable to a qualified disaster; 
  • payments by a person who furnishes or sells transportation as a common carrier by reason of death or personal physical injuries incurred as a result of a qualified disaster; or 
  • payments by a federal, state, or local government, agency or instrumentality to promote the general welfare, when the applicable federal, state or local authority, as determined by the Secretary of the Treasury, determines that disaster relief is warranted.

The exclusion does not apply to payments in the nature of income replacement, such as payments for lost wages, unemployment compensation, or business income replacement.  These items remain taxable (and deductible by payor).

During this pandemic, we have seen companies offer to reimburse their employees for many different items.  As long as the reimbursements are deemed necessary personal, family, or living expenses, they would qualify as Section 139 disaster relief payments. Although documentation rules are not specified, we recommend that you keep good records in the event of future questions.

As Employers are considering payments related to the COVID-19 pandemic, they need to determine the applicability of the qualified disaster payments rules. The last thing employers are trying to do under the current environment is to create an additional burden to their employees.

As companies begin to think about options for assisting their employers, they should consider all options for the best way to assist the employees and the communities in which they operate.

Please visit our Coronavirus resource page at schneiderdowns.com/our-thoughts-on/category/Coronavirus for related content.

 

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
CARES Act, Tax BY Austin Nace
Disappointing News for Employers: Employee Retention Credit Ends Before Fourth Quarter of 2021
Welcome News for the Trucking Industry - Clarification of 100% Meals and Entertainment Deduction for Per Diems
Build Back Better Tax Legislation Update – International Tax Changes
Higher Estate Tax Exemption Amount for 2022
Michael Jackson vs. Kenny Pickett
What to Expect When You’re Expecting a Single Audit
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×