3 Things to Know About Section 139 – It Might be Easier Than You Think to Support Your Employees Through COVID-19
September 3, 2020
While Congress continues to debate new stimulus legislation for those impacted by COVID-19, there are some alternative options already available that can help both employers and employees. When the President declared the pandemic a national emergency on March 13, 2020, he triggered a series of protections and aid that are only available during times of similar crises. Among those emergency measures is IRC Section 139, which provides preferable tax treatment for disaster reimbursements paid out by employers to affected employees.
What is Section 139?
Section 139 is intended to help companies help their employees by allowing tax-free reimbursements for disaster-related expenses. The tax code provision deems any reimbursements for eligible expenses to be “relief payments” paid out by the employer and are thus not taxable. The provision was first created in response to the terrorist attacks on September 11, 2001, to provide more avenues for people to seek and gain financial assistance. It has since continued to be made available each time a national emergency is federally declared.
The code provides much flexibility in determining what is and is not a qualified payment; however, assessing and documenting the eligibility of these reimbursements is crucial when adhering to Section 139. The unique and unprecedented nature of the current pandemic has created even more ambiguity than usual in determining what expenses are actually eligible.
Examples of how Section 139 can apply to the Pandemic
Providing the reimbursements to employees is completely at the discretion of the employer, but they bear the burden of determining which expenses are and are not directly attributable to the pandemic. Some companies may hold the perspective that there is no need to provide the option for reimbursements because employees are likely to be saving money due to the impact the pandemic has had on remote working environments and social activities. With more employees working remotely than ever before, it’s fair to assume that many individuals are spending far less on previously common expenses like car maintenance, dry cleaning, work lunches, social dinners, and bar tabs. Due to these savings, employers may assume that their employees are in an inherently better position to handle unexpected costs related to the pandemic.
On the other hand, the changes COVID-19 has brought to the average American life has also introduced new and increased expenses. For instance, families may have doubled their budgets for everyday items like toilet paper, groceries, and coffee as they spend more time at home. Likewise, the sudden shift to remote work may have triggered new spending on home office equipment and internet upgrades. For families with children, remote learning has spurred the need for at-home tutors, additional technology, or extra childcare. Section 139 provides the option for employers to consider these expenses as directly attributable to the pandemic and, therefore, eligible for reimbursement without the additional tax obligations.
Take advantage of Section 139 while you can
These examples and perspectives highlight the broadness of Section 139 and the ambiguity brought about by a lack of specific guidance. In addition to the uncertainty surrounding what qualifies, companies taking advantage of Section 139 face another big question: when does the current officially declared disaster end?
When the pandemic was first declared a disaster, many thought it would be over in a matter of weeks. Now, the US is grappling with a second wave, and there’s no immediate end in sight. Not to mention the fact that the economic impact of the pandemic will likely continue to be felt for years to come. Will employers be able to offer these reimbursements indefinitely? Or will the government signal a formal end to this disaster in the near future?
The current pandemic has probably pushed the boundaries of applying Section 139 more than ever before, but that creates new opportunities for companies looking for creative ways to support their employees. The IRS may never provide specific answers to the questions posed above, but within that flexibility lies the true benefit for employers and employees. The ambiguity of the tax code provides the space for companies to determine how to best support their employees, which is the ultimate goal.
The Bottom Line
To maximize the possible benefit from using Section 139 in light of these questions and uncertainties, companies should work with a knowledgeable advisor like those at Aprio. We can help you explore innovative ways to take full advantage of the opportunities available through Section 139, which you can then pass along as a benefit to your employees during these difficult times. If you have questions about offering reimbursements through Section 139, contact your Aprio Advisor or reach out to us for further assistance.
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.