Hurricane Harvey caused record-breaking devastation to Texas, followed quickly by Hurricane Irma, one of the strongest Atlantic storms in history, wreaking destruction in the southeastern United States. In the midst of these disasters, employers should be aware that section 139 of the Internal Revenue Code allows them to make qualified disaster relief payments to affected employees that are not includable in these employees’ gross incomes.
Employers may deduct any qualified disaster relief payments even though the payments are not included in employees’ gross incomes. An employer need not obtain detailed receipts and documentation for qualified disaster relief payments so long as the payments reflect a reasonable estimate of the employee’s losses and expenses attributable to the disaster.
Congress added section 139 to the Internal Revenue Code of 1986 through The Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-134, 115 Stat. 2427 (2001), in response to the Sept. 11, 2001, terrorist attacks. The scope of section 139, however, extends beyond victims of terrorist attacks and exempts payments received by victims of many disasters.
Section 139(a) states that “[g]ross income shall not include any amount received by an individual as a qualified disaster relief payment.” Section 139(b) goes on to define a “qualified disaster relief payment” as any amount paid to or for the benefit of an individual (1) to reimburse or pay personal, family, funeral or living expenses; (2) to reimburse or pay expenses incurred for the repair of a personal residence or replacement of its contents; (3) by a common carrier because of the death of the individual or physical injuries sustained by the individual; or (4) by a federal, state or local government to promote the general welfare; provided, in each case, that the payment is connected with a “qualified disaster.”
A “qualified disaster” includes any “federally declared disaster” as defined by section 165 of the Internal Revenue Code, namely, any disaster “determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.” No payment to or for the benefit of an individual will qualify under section 139 as a qualified disaster relief payment if the individual has previously been compensated for the losses or expenses by insurance or otherwise. Section 139(d) also excludes qualified disaster relief payments from payroll taxes and self-employment taxes, and exempts them from withholding requirements.
The Internal Revenue Service in Rev. Rul. 2003-12 (Dec. 19, 2002) declared that employers could reimburse their employees for expenses related to qualified disasters and that such payments are qualified disaster relief payments under section 139. Additionally, the Joint Committee on Taxation’s Technical Explanation of section 139 stated that Congress anticipated “that individuals will not be required to account for actual expenses in order to qualify for the [section 139] exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.” Employers can therefore reasonably estimate their employees’ disaster-related expenses and reimburse employees for those expenses without having to obtain detailed receipts and documentation. The Joint Committee on Taxation also stated “that payments excludable from gross income under [section 139] are still deductible to the same extent they would be if they were includable in income.” Consequently, employers can deduct qualified disaster relief payments made to employees.
Employers who make qualified disaster relief payments to employees need not include the payments on any employee’s Form W-2, issue any employee Form 1099, or withhold or pay payroll taxes on any of the payments.
Federally Declared Disaster Areas
Payments qualify for the exclusion from gross income provided by section 139 only if they are attributable to a federally declared disaster. As of Sept. 9, 2017, President Trump has made emergency declarations covering all of Texas and Louisiana because of Hurricane Harvey and covering all of Florida, Georgia, South Carolina, Puerto Rico, the U.S. Virgin Islands and the Seminole Tribe of Florida because of Hurricane Irma. The Federal Emergency Management Agency (FEMA) currently lists the following Texas counties as “major disaster areas”: Aransas, Austin, Bastrop, Bee, Brazoria, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller and Wharton. FEMA likely will update its list of major disaster areas once it evaluates the extent of the damage caused by Hurricane Harvey in Louisiana and Hurricane Irma in the Caribbean and southeastern United States.
For more information, contact any lawyer in the McGuireWoods Tax, Employee Benefits, and Private Wealth Services Groups. The Internal Revenue Service has provided an online list of other tax relief available to victims of Hurricanes Harvey and Irma. FEMA maintains a list of federally declared disaster areas.