Jacqueline N. Feliciano, Cotney Construction Law
On March 13, 2020, President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the "Act") as a result of the ongoing COVID-19 pandemic. This declaration is significant as COVI D-19's impact is now considered a federally declared disaster under Section 165 of the Internal Revenue Code (the "Code") that triggers relief under certain provisions of the Code. This Article focuses on the tax-free assistance
employers can now provide to employees under Section 139 of the Code ("Section 139").
As a federally declared disaster, COVID-19 is considered a "qualified disaster" under Section 139. Section 139, in turn, allows employers to provide employees with tax-free assistance. Specifically, employers can make qualified disaster relief payments to an employee that are fully deductible as an expense to the employer and are excluded from the employee's gross income. Since these qualified disaster relief payments are not subject to employment taxes, reporting on a W-2 or 1099 is not required.
A qualified disaster relief payment ("qualified payment") under Section 139 includes reimbursements or payments that are "reasonable and necessary personal, family, [or] living ... expenses incurred as a result of" the COVID-19 pandemic. The extent of what constitutes a reasonable and necessary payment under Section 139, however, remains unclear as it has never been utilized for a national pandemic.
Further, the ability to provide a qualified payment is not unfettered. Expenses that are otherwise compensated for by insurance or that are intended to replace lost income will still remain fully taxable to the employee. As a result, wage replacement payments, such as paid sick leave or family medical leave, are not covered under Section 139.
If navigated correctly, Section 139 can be used by employers to provide tax-free assistance to employees in managing the COVID-19 crisis that is fully deductible to the employer. Employers should contact their tax professionals to ensure they fully comply with the requirements of the Code should they provide assistance under
Section 139.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. Jacqueline N. Feliciano is an attorney at Cotney Construction Law who practices tax law and other transactional matters. Cotney Construction Law is an advocate for the roofing industry and General Counsel of FRSA. For more information, contact the author at 866-303-5868 or go to www.cotneycl.com.
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