With widespread hardship due to the Coronavirus pandemic, many companies are looking for ways to help their employees stay safe and healthy. Since the economic downturn is one of the most significant challenges individuals are facing right now, one of the ways that you may wish to assist your team is with a gift of money. Ordinarily, such assistances are subject to heavy taxation by the government. Fortunately, since President Trump has declared the COVID-19 pandemic a national emergency, special provisions come into place under Section 139 of the internal revenue code. As an employer, you can utilize Section 139 to provide financial relief to employees in this challenging time.
What is Section 139?
Section 139 was established in the wake of 9/11 to provide tax relief to employers who wished to financially assist their employees affected by the disaster. It allows companies to provide their staff with money outside of their normal pay in order to cover “reasonable and necessary expenses” that they have incurred as the result of an emergency. These monetary gifts are tax-exempt and are deductible for employers.
What is “Reasonable and Necessary?”
Section 139 does require that expenses covered by gifted funds are deemed “reasonable and necessary.” However, there is little regulation as to how this is determined. According to Proliant, some costs that are considered safely within these parameters are medical expenses not covered by insurance, public transportation costs, basic needs such as food and shelter, utilities, personal protective equipment, and funeral costs.
Employer Responsibilities
There are few employer responsibilities associated with Section 139. Since each disaster is so different and has different financial burdens, there is little verbiage in the document that details specific requirements for payment or qualifying expenses.
The Joint Committee on Taxation stated that “it is anticipated that individuals will not be required to account for actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.” However, this does insinuate that employers need to have reasoning behind how they arrived at the sum required to cover such expenses.
Because Section 139 is so vague, it is best to err on the side of caution when it comes to documentation. Avoid potential disputes with the IRS by keeping detailed records of all Section 139 payments and activities. This is especially important in the event that the national emergency declaration is lifted. If funds have already been dispersed, there may be some question as to whether or not they are still subject to taxation as gifts and having documentation about when money was deposited could be key. When in doubt, contact your lawyer or CPA for advice on best practices.
