For the most up-to-date content on recent fires, see our Tax Planning Guide’s Disaster Relief section.
On Tuesday, October 10, 2017, President Donald Trump declared the Northern California wildfires a qualified disaster. The declaration means employers may now provide tax-free relief to employees affected by the California wildfires through qualified disaster relief payments.
How It Works
Congress created a special type of compensation under Internal Revenue Code (IRC) Section 139 known as qualified disaster relief payments following the attacks on the World Trade Center in New York on September 11, 2001.
A qualified disaster relief payment is a payment made:
- To reimburse or pay personal, family, funeral or living expenses;
- To reimburse or pay expenses incurred for the repair of a personal residence or replacement of its contents;
- By a common carrier because of the death of the individual or physical injuries sustained by the individual; or
- 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.
In 2003, the IRS issued Revenue Ruling 2003-12 to clarify that employers may reimburse their employees for costs during qualified disasters and that such payments will be treated as qualified disaster relief payments under IRC Section 139.
Documentation
Employers can reasonably estimate their employees’ disaster-related expenses and reimburse employees for those expenses without having to obtain detailed receipts and documentation.
This is because the notes from Congress in passing Section 139 state 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.”
Deductions
The notes from Congress 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.
Making Payments
Organizations making payments to affected employees should code each individual payment specifically as such on their financials when the payment’s made rather run it through their normal payroll process.
There’s no need for employers who make qualified disaster relief payments to employees to:
- Include the payments on any employee’s Form W-2
- Issue any employee Form 1099
- Withhold or pay payroll taxes on any of the payments
We’re Here to Help
For more information about how your organization can provide tax-free relief to employees affected by the October 2017 California wildfires, contact your Moss Adams professional.