Generous employers who want to provide financial assistance to struggling employees have an option thanks to Internal Revenue Code Section 139, which allows employers to make non-taxable qualified disaster relief payments to employees who are impacted by the coronavirus. The payments may be deducted by the employer, but do not have to be reported on the employees’ W-2s.
Originally enacted after the 9/11 terrorist attacks, IRC §139 allows employers to assist employees impacted by a qualified disaster. There is no dollar limit for relief payments to employees, so long as the expenses are reasonable and necessary.
Expenses associated with the coronavirus that can be reimbursed may take many different forms, including:
- Unreimbursed medical expenses including co-pays and deductibles
- Increased expenses associated with being quarantined at home (e.g., increased utilities and home office expenses, as discussed below)
- Expenses associated with setting up or maintaining a home office such as internet connections, laptops, printers, computer monitors, office supplies, etc. (even if such expenses would not otherwise satisfy the home office deduction requirements)
- Nonperishable food purchases/reserves
- Increased childcare expenses
- Expenses to enhance mental health and physical well-being from social distancing such as meditation apps and home health fitness
- Housing for additional family members, (e.g., transportation and living expenses for college students returning home including duplicative meal expenses)
- Alternative commuting means in lieu of mass transit
Three broad categories of nonreimbursable expenses are:
- Payments that are reimbursed or reimbursable by insurance or otherwise
- Payments for expenses that are not reasonable and necessary
- Payments that constitute a income replacement (i.e., a payment for lost wages, lost business income, or unemployment benefits)
Some questions you may have about Section 139:
Do employees need to substantiate reimbursable expenses?
Employees are not required to account or substantiate actual expenses in order to qualify for the exclusion provided that the amount of the payments are commensurate with the expenses incurred.
However, employers should consider setting up a system that could include an application form and an affirmative statement from the employee that the requested funds meet the list of accepted items and aren’t reimbursable by insurance.
How will this impact payroll taxes or reporting?
Qualified disaster relief payments should be fully deductible. Although the payments aren’t taxable wages nor gross income, employers may reasonably take the position the the payments remain fully deductible to the same extent that they would have been if they were otherwise included in gross income or taxable wages. Section 139 denies “double benefits” with the likely result that self-employed individuals and other owner-managed employees may find their tax deductions limited if they receive a qualified disaster relief payment.
If I provide this program to employees, is my company at risk for a future audit?
We believe the IRS isn’t likely to audit a program that clearly limits payments to reasonable and necessary payments incurred as a result of the virus.
If you have questions about Section 139, please contact your Mize CPAs professional or Yvonne Brownell, CPA, CMA, CGMA. Visit our COVID-19 Resources Center to learn about other tax provisions made in the wake of the Coronoavirus pandemic.