FAQs: What is the Section 139 Tax-Free Disaster Assistance Deduction for COVID-19 Related Payments and Reimbursements?

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By Neha Karnwal and Komal Kabra

Section 139 allows employers to offer tax-free disaster relief payments to their employees for certain unreimbursed expenses. While Section 139 payments cannot be used to pay wages, they can be used to reimburse employees for “reasonable and necessary” expenses incurred due to the COVID-19 pandemic.

General Questions for Employers  

 QuestionsResponse
 1.What expenses qualify for the Section 139 deduction?Expenses must be:
  • Reasonable and necessary.
  • Incurred because of a disaster.
 2.What is the tax benefit for payments under Section 139?Employer: Full expense deduction.
Employee: No Federal taxes, FICA, FUTA, or self-employment taxes.  

State taxes will be assessed separately.
 3.Is there any limitation on the dollar amount of expenses which qualify for the deduction?No. However, the reasonableness of expenses will be considered.
 4.Do independent contractors qualify for the deduction?Yes.
 5.I am self-employed. Will my qualified expenses be covered by the deduction?Yes.
 6.What is the covered period for expenses to qualify?Beginning March 13, 2020.
 7.Will such payments or reimbursements from the business be considered gifts to employees?No.
 8.Are employers supposed to report these payments on W-2s or 1099s?No. However, employers will need to report Section 139 deductions on their state taxes.
 9.Are employers required to maintain any policy or documentation related to Section 139?No. However, employers should maintain an internal records policy that includes procedures for audits and inspections.
 10.Are employers required to maintain and monitor actual expenses paid and reimbursed?No, but employers must be prepared to justify the reasonableness of qualified expenses.
 11.What ways can employers manage payments and disbursements?Direct payment: Small businesses can pay employees directly through their business and maintain a record for such expenses.
Set up fund: Large businesses can set up an internal fund or use a captive fund to manage disbursements and payments.

Which Expenses Qualify for Section 139?

 ExpenseCovered or Not Covered?
 1.Salary payments when employees are not working due to business closure.Not Covered. Although the employee is facing hardship and the employer intends to help, this expense is not incurred because of a disaster.   Similarly, reimbursement for lost pay is not covered.
2.General salary payments.Not Covered. Payments must be made to cover a specific expense and not to replace an employee’s income.  

However, severance pay may be an allowable expense.
3.Unreimbursed medical expenses: Co-pays incurred due to COVID-19, or over the counter payment for medicine.  Yes.
4.Work-from-home expenses:
  • Cost to create home office: Such as purchasing a printer or home phone.
  • Increased cell phone expenses.
  • Increased utility costs incurred by the home office.
  • Cost of new or expanded internet access.
Yes.
5.Dependent care expenses:
  • Childcare or tutoring costs due to school closure.
  • Remote learning or home schooling expenses.
Yes.
6.Increased transportation expenses, such as increased commuting costs due to public transportation closures.Yes.
7.Funeral expenses, attributed to the funeral of an employee or their spouse or dependent who dies from a COVID-19 infection.Yes.
8.Other living expenses related to an employee’s known COVID-19 exposure, such as cleaning products to sanitize one’s home.Yes.

Conclusion 

For help using Section 139 to make tax-free disaster payments to your employees, contact your trusted Chugh CPAs, LLP professional.

Disclaimer: This article is not a legal or accounting opinion and is provided for general informational purposes only. Expense eligibility or deduction allowance for Section 139 is assessed based on the facts of each case.