Early this year when the President declared the COVID-19 pandemic a national emergency, he triggered Section 139, a rarely used provision of the tax law.
Section 139 was added to the Internal Revenue Code following the September 11th attacks under the Victims of Terrorism Tax Relief Act of 2001. The main thrust of Section 139 is that it empowers employers to make “qualified disaster relief payments” to their workers for disaster-related expenses which are deductible for the business but not taxable for the employee recipient.
Creating a Section 139 Plan for your business can help your workers return to maximum productivity with tax advantages to both the business and employee.
Section 139 provides that certain payments to individuals for “reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster” qualify for certain tax benefits, including that the payments are excluded from the recipient’s taxable income.
However, since Section 139 has not been used for a pandemic, there is some ambiguity about the types of expenses that will be allowed, but commentary suggests some examples of payments that may fall under this provision:
- Medical expenses that are not paid for by insurance (such as the employees deductible and out-of-pocket expenses)
- The cost of over-the-counter medications and hand sanitizer
- Work from home related costs like the cost of a computer, cell phone, printer, supplies, and an employee’s increased utility costs.
- Childcare and tutoring for family members that are not allowed to attend school
It should be noted that qualified disaster relief payments do not include:
- Payments for expenses otherwise paid for by insurance or other reimbursements
- Income replacement payments, such as payments of lost wages, lost business income or unemployment compensation
A considerable advantage of Section 139 is that impacted employees do not have to provide significant documentation or other proof of their expenses. In addition, there is no formal plan or documentation required to be maintained by the employer.
In Revenue Ruling 2003-12, the IRS recognized that given the “extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify the Section 139 exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.”
Still, since we are venturing into new territory here and there are no regulations interpreting Section 139 at this time, RINA recommends that employers document their intention to make payments covered by Section 139 and to track the following:
- The start and end date of any Section 139 “program”
- Amounts paid and to whom
- The expenses that will be paid or reimbursed on behalf of the employees
- Any maximum amount per-employee or in the aggregate that the employer will pay
Section 139 plans can be an excellent way for employers to help employees in need. However, because there are limitations or constraints on the payments, we recommend that organizations consult their tax advisor before undertaking such programs.
As always state conformity with federal tax law should be reviewed.
Please contact RINA if you have questions or need assistance with Section 139 planning or execution. We are here to help!