Disaster Relief Payments to the Rescue during COVID-19 Outbreak:
By: Jackie Meyer, The Concierge Cpa
Tags: Accounting Software, Accounting Firms, Taxes, Tax Strategy

How Meyer Tax is Applying Section 139 Correctly and Making our Streamlined Processes Available to other Accounting Firms

About Jackie Meyer CPA: CEO & Founder of Meyer Tax Consulting, The Concierge CPA, The Concierge Accountant Programs & currently developing TaxPlanIQ — a Saas Application for Tax Strategists.

After what became the world’s longest Spring Break ever (and all the moms, dads, grandparents, caregivers, and teachers nodded in unison), businesses and schools shut down nationwide due to the worst medical crises in modern-day history. As the whole country started logging into Zoom calls, our Meyer Tax team had already been fully remote for ten years, so we opened our virtual doors to our clients and colleagues to come and weather the storm together. We began brainstorming how best to navigate these unprecedented times the only way we knew how — with prayer, positivity, and perfecting and applying tax planning strategies. Here is our Section 139 Tax Strategy in a nutshell.

The Coronavirus, or COVID-19, on March 13, 2020, was declared a disaster under the Stafford Act. This declaration designated the pandemic as the most critical category of disasters that permit tax-free reimbursements by employers as a “Qualified Disaster Payment.” Adding to the individual tax benefit, the employer’s payments remain fully deductible.

Under the Stafford Act, Section 139 deems any “Qualified Disaster Payments” received by individuals not as income — including payments by an employer, not otherwise reimbursed by insurance, to its employees — with reasonable exclusions. In layman’s terms, employers can, under the Act, reimburse employees for disaster-related expenses on a tax-free basis, free from Form W-2 or Form 1099 reporting.

Employers may make payments to cover the increased per-employee costs relevant to all unreimbursed or pay reasonable and necessary expenses associated with and incurred due to the qualified disaster.

Meaning, businesses can deduct staff members’ expenses due to the pandemic. Companies can issue “qualified disaster relief” payments under Section 139 deductible to the company, not subject to FICA taxes, and completely tax-free to the employee. Applying this tax strategy presents a valuable tax-saving opportunity for companies. Our clients, on average, saved $1000 on every $3000 spent on qualified expenditures. Most of our clients exceeded that threshold and saved more.

We channeled our research into developing this strategy and others for our clients and then teaching best practices on implementation. We hired an attorney to collaborate with to ensure our strategies are sound. Within our new TaxplanIQ Saas Application for Tax Strategists, we have templates that track all of these expenses related to this strategy and many others.

Gross income excludes any payment received by an individual as a qualified disaster relief payment. A qualified disaster relief payment is any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary expenses incurred due to a qualified disaster.

INCLUDED ITEMS (but not limited to):

● Personal health/medical expenses -

○ copays, medications, sanitizers, face masks, vitamins, etc. not compensated for by insurance or paid with HSA or HRA or MERP (deductibles and out of pocket expenses)

○ for enhancing mental health and physical well-being such as counseling, meditation apps, and home health fitness

○ Non-perishable foods for reserve

● Living costs -

○ Cleaning products, sanitization mitigation expenses, etc.

○ Increased expenses associated with being quarantined at home such as increased utilities

○ Temporary housing or relocation

○ Housing for additional family members, e.g., transportation and living expenses for college students returning home, including duplicative meal expenses

● Telecommuting expenses -

○ Expenses associated with the creation of a home office including increased utilities and internet data usage, computer monitors, laptops, printers, office supplies, etc. (even if such expenses would not otherwise satisfy the home office deduction requirements)

● Dependent care expenses -

○ increased child care or tutoring costs when schools closed

○ remote learning or homeschooling expenses, including internet and personal devices (if not already reimbursed for telecommunication), subscriptions to educational resources, educational materials, etc.

● Increased Transportation Expenses -

○ directly related to limited or no access to public transportation

● Critical Care or Funeral expenses -

○ dedicated to employee, partners, or dependents who are treated for and/or die from COVID-19

EXCLUDED ITEMS:

● Items covered by insurance or other sources

● Nonessential items, luxury items, decorative items, and services (e.g., Netflix subscription)

● Payments for lost income or compensation (e.g., wages, sick pay, family medical leave pay, etc.)

● Payments made which have no connection to the Covid-19 Qualified Disaster.

● Payments made for employee expenses that pre-date Covid-19

We recommend considering implementing policies and devoting extra administrative time and labor in the schedule and budget to issue qualified disaster payments and use Section-139. The good news is that there won’t be increased administrative work on the end of tax reporting on 1040 since, as of now, there is no additional reporting required. Though we highly recommend checking with the IRS on 1099 reporting for 2020 as this may change.

And we all hope that we don’t have to use this tax strategy any time soon again in the future. We are happy to share these insights since most Accounting Firms and their clients are doing their year-end planning and stress the importance of utilizing this hopefully one-time tax strategy for 2020. And by partnering with TaxplanIQ, you can always keep up to date with the latest applicable strategies like this one.

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