Disaster Relief Section 139
Under certain circumstances, employers can make tax-deductible disaster relief payments to employees who can then exclude those payments from their gross income.
Commonly referred to as Section 139, disaster area tax relief, federal disaster area tax relief and Section 139 qualified disaster assistance.
Do I Qualify for the Disaster Relief Section 139?
If your employees have been affected by a federally declared disaster, you can make qualified disaster relief payments to them to help cover certain disaster-related expenses, and your business can take a tax deduction for those payments.
2022 Disaster Relief Section 139 Details
When employees are affected by a federally declared disaster, the tax code offers benefits for payments the employer provides to help employees recover financially. If the payments qualify under IRC Section 139, they may be deductible business expenses for the employer and excluded from employees’ gross income.
What payments qualify under Section 139?
Section 139 disaster relief payments can be excluded from employees’ gross income for the following reasons:
• To reimburse or pay for personal, family, living or funeral expenses incurred as the result of a federal disaster
• To reimburse or pay for expenses incurred to repair a personal residence or replace its contents to help recover from a federal disaster, to the extent not covered by insurance.
A written plan must be made that:
• Compensates for employees’ qualified disaster-related expenses not covered by insurance
• Specifies that amounts should equal reasonable and necessary personal, living and family expenses, as defined in the plan
• Makes clear that it doesn’t cover nonessential, luxury or decorative items and services
• Details how to submit claims and how amounts will be paid or distributed
There is no cap on the amount you can pay to employees under this section. The law does not limit how much can be paid to each employee, nor does it limit payment to shareholders/employees. However, the law does prohibit making disaster payments in place of salary.
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• Employer can choose to reimburse or pay the employee.
• Available for shareholder-owner employees.
• Expenses are broader than with an accountable plan (e.g., nanny care, home health care, funeral expenses).
• Payments are not taxable income to the employee.
• Employers can choose which employees qualify (e.g., only executives).
• No maximum expense/reimbursement amount per employee.
• Must substantiate the expenses through a written plan.
• Not available for Schedule C or for non-W-2 employees.
Assumptions When Taking the Disaster Relief Section 139
• None noted.
• None noted.
Requirements to Claim the Disaster Relief Section 139
• Payments must be made for damages that result from a federally declared disaster (or other circumstances described in the law).
• The expense must be reasonable and necessary for the employee and must not be compensated for by insurance or otherwise.
• A written plan is required.
Business Entities That Can Claim the Disaster Relief Section 139
• Schedule C
• Schedule F
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.