COVID-19: What Qualifies as Tax-Free Disaster Relief?

When President Trump declared the COVID-19 pandemic as a national emergency on March 13, it triggered IRS provisions that allow companies to provide employees with tax-free disaster relief payments.

Due to need and the uncertainty caused by COVID-19, we encourage employers to explore this option as a favorable means of providing assistance to employees who are burdened with COVID-related expenses.

Qualifications

These payments are not subject to income or employment taxes as long as they meet the qualifications outlined in Section 139 of the Internal Revenue Code, which state that disaster relief payments:

  • Must be for reasonable and necessary expenses as a result of the disaster
  • Cannot be a replacement for an employee’s income and must be for a specific expense
  • Cannot be for expenses that are reimbursed by insurance or another source

What About Work-From-Home Expenses?

Tax reform deemed business expenses as no longer deductible. However, if an employer is reimbursing employees for work-from-home expenses during the pandemic, the reimbursement itself may be non-taxable.

For example, an employee cannot claim tax deductions for adding internet service, a new computer or printer, general office supplies, or any other cost incurred due to working at home. However, if the employer reimburses the employee for these expenses that are required for work, the employer can deduct the portion of expenses used exclusively for work from their taxes and the reimbursement will not be considered as taxable income for the employee.

Relocations & Temporary Assignments

Many relocations have been impacted by COVID-19 due to travel restrictions and shelter-in-place protocols, which limit the movement of individuals and the services available to them.

Consider this scenario: A transferee’s 60 days of housing ended on April 15, but their state was still under a shelter-in-place order, making it impossible for the transferee to find a new home. In this case, a 60-day housing extension would be necessary and qualify as a non-taxable expense, due to its direct correlation to the COVID-19 pandemic.

Following are additional examples of payments that may qualify under Section 139. Please note, these would be additional expenses – outside of the normal relocation policy – and a result of COVID-19.

  • Temporary housing and meals for employees who have vacated their previous home and cannot move into a new permanent home
  • Transportation and/or housing for other family members, i.e. a college student who was required to vacate their on-campus housing and return home
  • Temporary lodging for employees stranded overseas due to travel restrictions
  • Temporary lodging for employees who returned from overseas but cannot move into their primary residence
  • Extended storage of household goods because the items cannot be shipped to the residence
  • Additional commuting costs, i.e. use of single transport (Uber and taxies) vs. mass transit
  • Health-related expenses. i.e. hand sanitizer, disinfectants, face masks
  • Dependent care expenses due to school or place of care closings
  • Tutoring and home schooling expenses due to school closings

What Employers Need to Know

The IRS does not require an employer to establish a disaster reimbursement plan; however, a formal and documented plan is recommended. As a best practice, employers should share it with employees to clearly outline what the company will and will not reimburse.

Section 139 does not require record keeping or substantiation of the payments. However, it is highly recommended that the employer maintain records to support each payment and deduction. When possible, they should collect expense receipts and/or written confirmation from the individual for the incurred expenses.

Again, employers should explore their reimbursement options to help ease employees’ financial burdens that are related to COVID-19. During this time of uncertainty, this type of support goes a long way.

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