Qualified Disaster Relief Payments

In the aftermath of Hurricane Ian, the cleanup efforts have just begun in much of Florida and the Carolinas. In addition to the IRS granting a tax filing extension to February 15, 2023 for those impacted by the hurricane, the internal revenue code also provides for tax relief through loss deductions and income exclusions for individuals suffering from a qualified disaster. This article addresses the application of the income exclusion for qualified disaster relief payments paid by an employer to an employee. We have previously covered the casualty loss deduction here.

What is a Qualified Disaster?

A qualified disaster is defined as a disaster resulting from terroristic or military action, a federally declared disaster, a disaster determined by the IRS to be of catastrophic nature, or a disaster determined by federal, state, or local government or agency. On September 29, 2022, President Biden officially declared a major disaster and opened areas impacted by Hurricane Ian to receive federal disaster assistance and “unlocking” tax relief available under the internal revenue code.

Income Exclusion for Employer Payments

During difficult times like these, many employers seek ways to help their impacted employees while also creating a tax burden for their employees through additional compensation. When structured correctly, employers should be able to provide relief payments that are not taxable to their employees. The IRS has previously provided guidance that may allow employers to pay or reimburse employees for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Employer payments may also be used to repair or rehabilitate a personal residence and its contents. While ordinarily any payments made to employees would be treated as compensation, subject to employment tax, qualified disaster relief payments are exempt from both taxes under Section 139. In addition, the employer is entitled to a full deduction for these payments. To the extent that any payment is later compensated for by insurance proceeds or otherwise reimbursement it will be included in the employees income.

Record Keeping Requirements

While Section 139 is silent on requirements for employees to substantiate expenses that an employer reimburses through qualified disaster relief payments, we recommend the employer have a written policy covering the payment of expenses incurred as a result of a qualified disaster. We also recommend that the employer receive an employee acknowledgement letter containing the following:

  • The amount being requested
  • Representation of eligibility to participate in the program
  • A statement that the payments will only be used for qualified expenses
  • The employee should be responsible for maintaining records of the amounts received and used for qualifying expenses as well as any insurance proceeds received as part of their tax records.

    Please reach out to your HBK Tax Advisor if you would like additional information about qualified disaster relief payments.

    About the Author(s)
    Donald is a Senior Tax Manager in the Tax Advisory Group of HBK CPAs and Consultants. Donald has over nine years of experience in taxation with a focus on privately held businesses and high-net-worth individuals. His areas of expertise include partnerships, S corporations, C corporations and individual taxation. He also assists his clients with year-end planning, merger and acquisition planning, choice of entity planning, and conflict resolution.
    Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.