In view of the devastation caused by Hurricane Harvey, employers are reminded that disaster relief payments made to employees who are victims of the storm may be excludable from gross income and taxable wages under IRC Section 139.

Background

IRC Section 139, added to the Code by the Victims of Terrorism Tax Relief Act of 2001, states that gross income does not include any amount received by an individual as a "qualified disaster relief payment." IRC Section 139(d) further specifies that a qualified disaster relief payment also will not be treated as wages for employment tax purposes or as net earnings from self-employment for self-employment tax purposes.

The term, "qualified disaster relief payment," means any amount paid to or for the benefit of an individual:

— To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
— To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent such need is attributable to a qualified disaster, or
— By a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.

However, qualified disaster relief payments do not include payments for any expenses compensated by insurance or otherwise.

A "qualified disaster" means, among other things, a presidentially declared disaster as defined in IRC Section 165(h)(3)(C)(i) — i.e., any disaster determined by the President to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

Employer payments to aid Hurricane Harvey victims

As a result of Hurricane Harvey, President Trump has declared various counties in Texas as major disaster areas. The President also made an emergency declaration for Louisiana; however, the Federal Emergency Management Agency (FEMA) has not yet listed the specific areas covered. (Note that the Louisiana governor requested assistance for the parishes of Beauregard, Calcasieu, Cameron, Jefferson Davis and Vermillion.)

The legislative history to IRC Section 139 indicates that a qualified disaster relief payment may be from any source, including an employer. The legislative history further provides that "in light of the extraordinary circumstances surrounding a qualified disaster, 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 payments can be reasonably expected to be commensurate with the expenses incurred."

In Revenue Ruling 2003-12, the IRS cited this legislative history and ruled that employer grants to employees to cover medical, temporary housing and transportation expenses incurred as a result of a presidentially declared disaster (which were not reimbursed through insurance or otherwise) were excludable from income, even though the employees were not required to provide proof of actual expenses in order to receive a grant. However, the IRS indicated that the employer program at issue contained requirements to ensure that the grant amounts were reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary medical, temporary housing and transportation expenses incurred as a result of the disaster.

Deductibility of relief payments

The legislative history to IRC Section 139 states that no change from prior law was intended as to the deductibility of qualified disaster relief payments made by an employer merely because the payments are excludable by recipients. "Thus, it is intended that payments excludable from income under the provision are deductible to the same extent they would be if they were includable in income."

Ernst & Young LLP observations

Payments made by an employer to employees who reside in the affected areas, which were declared disaster areas by President Trump, will be excludable from income if they are intended to cover reasonable and necessary personal, family, living or funeral expenses incurred as a result of Hurricane Harvey.

Payments to cover reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence are also excludable, to the extent the need to repair or rehabilitate the residence is attributable to Hurricane Harvey.

Such qualified disaster relief payment also will not be treated as wages for employment tax purpose or as net earnings from self-employment for self-employment tax purposes.

Importantly, employers do not need to require employees to document their actual expenses, provided that the amount of the relief payments are reasonably expected to be commensurate with the expenses incurred.

Texas counties eligible for disaster unemployment benefits

Aransas
Bee
Brazoria
Calhoun
Chambers
Fort Bend
Galveston
Goliad
Harris
Jackson
Kleberg
Liberty
Matagorda
Nueces
Refugio
San Patricio
Victoria
Wharton

———————————————

———————————————
ATTACHMENT

EY Payroll News Flash