During these tragic times businesses may want to help employees affected by the local fires. The purpose of the following information is to highlight some tax efficient opportunities to help employees affected by the local fires which were declared a qualified disaster by President Trump. IRC section 139 allow employers to provide qualified disaster relief payments to employees that have incurred unreimbursed expenses due to a qualified disaster (such as the local fires) and have those payments excluded from the employees gross income and included as deductible expense for the business making the payment. For the payments to be considered qualified disaster relief payments, they should be for either items i. or ii. below, but only to the extent not already covered by insurance.
- Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a disaster. This would include expenses related to loss of use.
- Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
Other items to point out:
To maximize the tax benefit of these payments, take steps to ensure that payments to employees are for expenses that not covered by insurance. For example, reimburse deductibles and expenses specifically excluded from insurance coverage first. Then consider other items that may require further correspondence with insurance adjusters.
Due to the extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses provided they are reasonable and commensurate with the expenses incurred. As such, use your own judgment to determine reasonableness but it is not necessary to obtain receipts or records before reimbursing employees.
Example:
- Individual A is an employee of Z Company. A and her family evacuate their home due to a qualified disaster and stay at a hotel across town for one week and incur $1,500 of hotel room charges, $300 in incidentals (clothing, toiletries, etc.). A learns that insurance policy has $2,000 deductible so no claim is filed. Z could reimburse A $1,800 and deduct that expense, while A excludes the payment from taxable wages.
- Same as example 1 above but A receives $2,000 FEMA payment. As the incurred expenses were covered by FEMA, no qualified disaster relief payment can be made to A by Z.
- Same as example 1 except A’s home is destroyed in the fire. A spends $750,000 to rebuild home and incurs $250,000 of other related costs such as loss of use and incidentals. Insurance and FEMA compensate A $800,000. Z could reimburse A $200,000 and deduct that expense, while A excludes the payment from taxable wages.
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