COVID-19 Update: Beaird Harris has shifted a significant number of our team members to work remotely.
We continue to serve and care for our clients, just as we always have, and are available by phone, video or email.
Beaird Harris will be closed on Friday, July 3rd in observance of the Independence Day holiday.
December 3, 2020
After the terrorist attacks on September 11, 2001, Congress added a little-known tax provision, Code Section 139, to the tax law. This provision exempts certain payments to employees from taxation during a disaster or terrorist attack.
The President’s COVID-19 national emergency declaration on March 13, 2020 triggered the disaster provisions of the tax law. The IRS specifically states that this is a “federally declared disaster” for purposes of invoking Section 139 in its COVID-19 FAQs.
Tax-Free Payments to Employees
Under this code section, a business can make tax-free payments to its employees. The qualified COVID-19 disaster relief payments are free from income tax, payroll taxes, and self-employment tax. Not only are the payments tax-free to the employee, they are deductible to you as a business expense – the best of both tax worlds. An employer can make payments for expenses incurred while the COVID-19 pandemic continues to be a qualified disaster, as determined by the President.
Expenses That May Qualify for Tax-Free Treatment
While the IRS has not provided any specific guidance on eligible COVID-19 expenses, there is IRS guidance from previous disasters, including the 2014 Ebola virus outbreak.
The following are examples of COVID-related expenses that may qualify as tax-free payments under Code Section 139:
Expenses That Do NOT Qualify for Tax-Free Treatment
What is the Catch?
As with all tax matters, there are several factors to consider before implementing this strategy. The IRS has NOT issued clear guidance directly related to the COVID-19 disaster, which leaves open some element of risk. Another key consideration is to WHOM the benefits are offered. It is unclear if the same program would need to be offered to all employees, or if you could offer different benefits to different employees, for example by job description or class. As an example, different “classes” of employees could include:
We would caution against any program that only covered owners or other highly compensated employees and is not offered to “rank and file” employees.
The disaster provisions stipulate that employees are NOT required to account for their expenses to the employer. Therefore, no written plan or documentation is technically required if the payments received and treated as tax-free are reasonably expected to be commensurate with the expenses incurred. At a minimum, you should have employees sign a written certification that the money received is necessary for COVID-19-related expenses and that those expenses are not otherwise reimbursable.
Despite this generous relief, we recommend you implement a formal, written plan in case of IRS audit that includes:
We also recommend the following:
During the COVID-19 pandemic, you established a plan to help employees with telecommuting expenses, allowing each employee to receive a $1,500 grant for equipment, supplies, and increased cost of home utilities.
Your employees John and Jane each apply and each estimate they will spend $1,500 on a form you provide. The tax results are as follows:
We have seen our clients go above and beyond to help their employees during this difficult time. Section 139 relief can allow the help to go even further, with no taxes owed by the employee. If you are interested in pursuing this strategy for your company, please reach out to your Beaird Harris tax advisor and we would be happy to brainstorm ideas with you.
No Professional Advice, Client Relationship, or Reliance on Information
Please note that any information or content on our Website, or any forms or tools on our Website which allow you to submit information or make calculations, and your use thereof, are not intended to provide any kind of professional advice, consultation or service, including but not limited to, legal, accounting, tax, or business advice. Nor does any such information, content, forms, or tools, or your use thereof or reliance thereon, create or constitute an attorney/client, accountant/client, or consultant/client relationship. You should therefore not use our Website or reliance on any information, content, forms, or tools on our Website as a substitute for any kind of professional advice. Rather, you should consult with a licensed professional, including one employed by our Company, for any accounting or tax questions you may have. You agree that we will not be liable to you or to any third party to the extent you treat or consider any information, content, forms, or tools on our Website as constituting any kind of professional advice. The information and content, including but not limited to forms and tools, presented on or made available through our Website are made available solely for general information purposes. We, therefore, do not warrant the accuracy, completeness or usefulness of any such information, content, forms, or tools, and any reliance you place on the same is strictly at your own risk. We disclaim all liability and responsibility arising from any reliance placed on such materials by you or any other visitor to our Website, or by anyone who may be informed of any of its content.
Our Website provides illustrative lists of services that we provide. Nothing contained on our Website shall be construed as an offer or guarantee to provide any particular services to you, nor shall anything on our Website be construed as a direct solicitation for employment by any persons, companies, or organizations. Prior results we have obtained for others do not guarantee a similar outcome.