On March 13, 2020, a nationwide emergency was declared as a result of the SARS-CoV-2 virus. This declaration triggered the ability for employers to make certain qualified disaster relief payments to employees that, pursuant to IRC §139, are deductible by the company as a regular business expense and excludible from taxable gross income by recipient employee.

In order for a payment to remain eligible for this advantageous treatment, the following criteria must be met:

• The expense must have arisen as a result of the COVID-19 pandemic; and
• The expense for which the payment is remitted must be “reasonable” and “necessary” in nature; and
• The expense must be either personal in nature, related to a living expense, family oriented, or funeral-related; and
• The employee cannot have received a reimbursement or payment from any other organization or person for the same expense, including insurance payments.

The IRS defines an expense as “reasonable” when it is “necessary” in the ordinary course of business. The IRS defines an expense as “necessary” when it is “…helpful and appropriate for [the] trade or business.”

The IRS has set a precedence that medical expenses qualify under §139 treatment. Note that payments for lost wages or unemployment are explicitly excluded. Expenses qualifying under §139 treatment have no maximum, and do not get phased out after a certain amount.

An employer is not required to collect receipts or acquire other substantiation of expenses incurred by employees before providing payment pursuant to §139. Although not required, it is still recommended that documentation be obtained for record keeping purposes, and to help curb fraudulent reimbursement claims from employees. In addition, employers should consider establishing a disaster policy that includes guidelines under which the employer may or could reimburse employees for certain expenses incurred as a result of the qualifying disaster.

If you believe that your business or you as a sole proprietor would like to look further into taking advantage of §139 qualified disaster relief payments, consult your tax advisor. Neitzel Luke & Salopek Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.