Implications of Payments Made to Individuals by Employers and Philanthropic Organizations after the Declaration of a National Emergency

On March 13, 2020, the President declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act for the COVID-19 pandemic. This action will free up federal resources to combat the disease in the United States. 

Relief Payments Non-Taxable to Recipient

This declaration also triggers the provisions of Internal Revenue Code (“IRC”) Section 139. IRC §139(c)(2) provides that for purposes of Section 139 that a federally declared disaster includes a “federally declared disaster (as defined by [IRC] section 165(i)(5)(A)),” which cross-reference provides:

“The term “Federally declared disaster” means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.” 

Rev. Rul. 2003-29, IRB 2003-11 provides that “For purposes of section 165(i), a disaster includes an event declared a major disaster or an emergency under the [Stafford] Act.”

IRC Section §139(a) provides that gross income shall not include any amount received as a “qualified disaster relief payment.” Qualified disaster relief payments include “any amount paid to or for the benefit of an individual:

1. To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
2. 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,
3. 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
4. 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, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.” IRC §139(b)

Note: qualified disaster relief payments do not include wage replacement payments, which remain subject to taxes.

Relief Payments not Subject to Employment Taxes

For employers, qualified disaster relief payments are exempt from employment taxes. IRC §139(d) provides:

“For purposes of chapter 2 and subtitle C, qualified disaster relief payments and qualified disaster mitigation payments shall not be treated as net earnings from self-employment, wages, or compensation subject to tax.”

Additionally, employers may deduct qualified disaster relief payments that are reasonable and necessary business expenses.

Relief Payments Paid by Foundations and Charities

The last time IRC §139 was implemented in connection with an infectious disease was in 2014. At that time, the Ebola outbreak was declared a qualified disaster in Notice 2014-65.

The Notice references Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations to provide additional guidance on how charitable organizations, including employer-related private foundations, public charities, private foundations, and donor-advised funds, could make relief payments to individuals. Publication 3833 is a good beginning reference on how a business, public charity or foundation can provide relief assistance payments through charitable vehicles in response to COVID-19 after the declaration of a national emergency. 

For additional guidance, please contact one of these or another member of the Clark Hill Tax Exempt and Nonprofit Team:

Duane L. Tarnacki (Detroit) dtarnacki@clarkhill.com

Robin D. Ferriby (Birmingham) rferriby@clarkhill.com

Katherine E. David (San Antonio) kdavid@clarkhill.com

Bradley Fletcher (Dallas) bfletcher@clarkkill.com