Tax Free Assistance Payments

Do you have employees affected by Hurricane Harvey? We have had clients asking, how can we help? Many employers are trying to help their people that are affected or displaced by Hurricane Harvey. U.S. Code § 139 provides income tax relief for federally declared disaster areas. Here are the criteria:

The disaster must be a federally declared disaster, that is not the only definition, but for this article, it is the focus. The President has declared specific counties a federal disaster area as a result of Hurricane Harvey.

The payment must be made to an individual for the following:

• 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 that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,
• by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
• if such amount is paid 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.

It is only tax free to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.

These payments are NOT subject to employment taxes. In Revenue Ruling 2003-12 the IRS has indicated that they won't require individuals to account for actual disaster-related expenses for payments to qualify as qualified disaster relief payments, if the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.

This isn’t just limited to employers, payments can be from any source and be tax free to the recipient.

Wesley Middleton is the managing partner at MRZ LLP, a Houston, Texas-based accounting firm voted Best Place to Work by the Houston Business Journal. Wesley is the author of Violent Leadership (Forbes Books, 2017) and is represented by PumpJack Speakers Bureau. To book Wesley for your event, email Wesley.Middleton@PumpJack.me or click here.