Qualified Disaster Payments and Code Section 139

What is a Qualified Disaster Payment?

During these challenging times, laws have been passed to create relief for businesses and their employees. For example, under Code Section 139, employers can provide tax-free “qualified disaster payments” to reimburse employees for expenses specifically due to COVID-19.

Because most business owners are also employees, they can make these tax-free payments to their employees and to themselves. They are both non-taxable for the employee and deductible for the employer.

Any payment providing benefits for disaster relief can be considered a qualified disaster payment, including personal, family, living and funeral expenses (as long as they are not covered by insurance). However, any form of compensation (wages, sick pay, vacation leave, etc.) is excluded.

 What are examples of Qualified Disaster Payments?

Here are a few (non-exhaustive) examples of qualified disaster payments. Your business can reimburse you (tax-free) if you…

…have an infected individual in your home and have to pay for a deep clean

…purchase higher speed internet now that you work from home (only the increase would be covered)

…purchase over-the-counter medication, hand sanitizer, disinfectant supplies, thermometers, etc. assisting with COVID-19

…have additional childcare or tutoring expenses due to school closings

…have increased utility and toilet paper expenses now that you work from home

…are paying for ride-sharing services to avoid the health risks associated with public transportation

 And finally…

 Keep in mind that every state treats this issue slightly differently.

  • Make sure you refer to your state guidelines to ensure you are properly reporting all payroll taxes.
  • The code warns against “excess”, extravagant”, or “unnecessary” purchases, so luxury purchases are excluded.
  • Be careful regarding qualified payments that only go out to the business owner and not to employees.
  • Expenses do not need to be substantiated and receipts do not need to be provided (unless you describe it as a reimbursement).
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