Financial Assistance for Small Business Owners Affected by COVID-19: Disaster Assistance Payments
Even the most prepared businesses need to plan for what happens if cash flow decreases or runs out. With the uncertainty of how COVID-19 will affect your business long term, you may be wondering how long you can continue to pay your employees or rent. President Trump’s national emergency declaration on March 13th triggered tax code Section 139, which allows employers to exclude disaster assistance payments from employee’s income. In part three of our three-part series of blog posts, we'll discuss how tax code Section 139 can help you assist your employees. Tax code Section 139 enables employers to make non-taxable qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the coronavirus pandemic. It allows employers to provide direct financial assistance to employees impacted by a qualified disaster without adverse tax consequences. What qualifies as a reimburseable expense? Reimbursable expenses associated with the coronavirus may include:
Unreimbursed medical expenses including co-pays, deductibles, vitamins, and supplements
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 enhanced internet connections, computer monitors, laptops, printers, office supplies, etc. (even if such expenses would not otherwise satisfy the home office deduction requirements)
Housing for additional family members, (e.g., transportation and living expenses for college students returning home including duplicative meal expenses)
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
Alternative commuting means in lieu of mass transit
What are nonreimbursable expenses?
Payments for expenses that are not reasonable and necessary
Payments that constitute an income replacement program (i.e., a payment for lost wages, lost business income, or unemployment benefits)
Payments that are reimbursed or reimbursable by insurance or otherwise
Are there deduction limitations? Qualified disaster relief payments should be fully deductible. Even though the payments are neither taxable wages nor gross income, employers may reasonably take the position that 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. However, Section 139(h) denies "double benefits" with the likely result that self-employed individuals and other owner-employees may find their tax deductions limited if they are actually a recipient of a qualified disaster relief payment. What is the dollar limit? Section 139 does not impose a dollar limit. An employer could provide an affected employee with a six-figure payment as long as the expenses in question are reasonable and necessary. Is plan documentation necessary? A written plan document is not required or recommended. Nevertheless, given the benefits of tax-free status for qualified disaster relief payments, employers should consider adopting an administrative system that validates such payments meet the Section 139 requirements. Such a system can include an application form and an affirmative statement from the employee that the requested funds are necessary for expenses associated with the coronavirus and confirms that such expenses are not reimbursable by insurance. Additional information about Section 139:
Qualified disaster relief payments are excluded from gross income and wages for payroll tax purposes. In addition to being exempt from payroll taxes, such payments are not subject to information reporting on either Forms W-2 or Forms 1099-MISC.
Payments are not subject to discrimination testing.
Section 139 also encompasses cash advances to pay for covered expenses that the employer reasonably expects the employee to incur.