Helping Employees with Hurricane Ian Recovery:
Non-Taxable Disaster Relief Payments
Many of my clients and associates are involved in the Hurricane Ian relief and recovery efforts in one way or another, through company or personal donations of money, supplies or volunteer time. We all want to know that the money will get where it is supposed to go, so there are right (and wrong) ways to do our disaster relief.
A variety of charitable vehicles (e.g., company foundations, company-affiliated charities, company-advised funds at existing charities) can be effective and tax-efficient ways to accomplish employer/donor goals in times of disaster.
Qualified Disaster Relief Payments
A form of disaster relief becoming more and more common is companies providing funds specifically to their employees and their families impacted by disasters. Under Internal Revenue Code Section 139, companies can pay certain expenses for employees as deductible expenses that the employees will not have to include in income.
Known as “qualified disaster relief payments,” they include reimbursements or payments for reasonable and necessary personal, family, living or funeral expenses that are a result of a qualified disaster. In addition, amounts paid for reasonable and necessary expenses incurred for the repair of a personal residence or its contents also qualify. This can even apply to a vacation home, but not to a home that is rented to someone other than the employee.
A qualified disaster includes a federally declared disaster, and therefore applies to damages from Hurricane Ian in Florida, Georgia and South Carolina.
The payments can also be made to independent contractors and owners or relatives of owners of an S corporation or a C corporation. Again, the payments will not have to be included in income.
Employer Benefits
The employer will be able to deduct these payments of employee expenses and will not have to pay employment taxes, workers compensation, unemployment compensation, or pension contributions on the payments. Employers can even consider providing qualified disaster payments in lieu of other forms of compensation such as future bonuses.
Limitations
However, qualified disaster relief payments may not apply to payments made by a partnership to a partner – though if the partner puts their partnership interest into an S corporation before the payment is made, then it may qualify.
Another limitation is that expenses can only qualify if not already compensated by insurance or other sources, and these Section 139 payments cannot be deducted as casualty losses. In other words, there can be no “double dipping.”
Disaster Committees
Companies can choose to set up a disaster committee to organize the distribution of disaster relief to employees and their families. The committee can establish the total amount of the relief fund and address issues that could affect the amounts given to an employee, such as length or type of service.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
