Tag Archives: Tax

Tax Breaks for Qualified Disaster Relief Payments to Employees

Contributed by Rebecca Dobbs Bush, March 24, 2020

You have dedicated employees that continue to courageously and diligently work the “front lines” during this time. Or, perhaps you’ve had to furlough or issue temporary layoffs to employees and you want to find some way to ease the burden on them.  Perhaps it’s not out of the simple goodness of your heart. Perhaps it’s because you’re cognizant that self-isolating individuals are on social media more than ever and that everyone seems to be sharing information about the policies employers are implementing during this time.

Regardless of your motivation, when President Trump invoked the Stafford Act on February 13, 2020, he opened the door to a range of possibilities in structuring “qualified disaster mitigation” payments to your employees under Section 139 of the Code.  These payments are advantageous to both employers and employees.  They are not subject to income taxes or payroll taxes.  Yet, an employer is still allowed to claim them as a deduction.

Because it’s not every day (fortunately) that a qualified disaster is declared, there is very minimal clarifying guidance from the IRS.  Instead, the definitions are broad and flexible allowing for reimbursement of expenses that can be considered “reasonable and necessary” as a result of the “qualified disaster.”  Payments cannot simply be income replacement, such as sick, vacation, etc.  The expenses you are reimbursing need to be:

                1) expenses that are not otherwise covered by insurance; and

                2) “reasonably related” to personal, family, medical or housing expenses related to the “qualified disaster.”

There is no stated cap or limit on the amount you can issue as tax-free reimbursement.  Further, the IRS has made clear that if the reimbursement amount is “reasonable,” you do not need to require documentation to substantiate the expense from your employees. 

To illustrate some ideas of reimbursable expense that might be considered “qualified disaster” payments under Section 139, see the following examples:

·         A company sent employees to work from home with a $250 stipend for equipment they need and a $50/month allowance for internet and phone service.

·         A large financial industry employer is paying for branch employees’ transportation costs so they can avoid public transit systems, where they might be exposed to the virus.

·         A smaller company that cannot sustain wage continuation or work from home arrangements, issues all employees on temporary layoff a $1,000 stipend as housing assistance during that time.

·         Finally, another company is reimbursing hourly employees for up to $100 per day in childcare costs.

Each industry is different and addressing different concerns. But so long as they are not designed as a flat-out substitution of regular wages, an employer can be creative in designing tax-advantageous “qualified disaster” payments. 

Legislative Relief for Employers and Their Employees Affected by the Coronavirus Pandemic

Contributed by guest authors Meredith Murphy and Robert Jackson, March 22, 2020

On March 18, the president signed into law H.R. 6201. Division G of the law provides tax credits for businesses that compensate their employees for time off due to the Coronavirus pandemic. The purpose of the law is to help employees.

A tax credit is more valuable than a tax deduction. For example, a $10 credit reduces tax by $10. But the value of a $10 deduction depends on the taxpayer’s tax rate. If that is 36%, the value of the deduction is $3.60.

ADMINISTRATIVE EXPLANATION OF THE NEW LAW

On March 20, 2020, the Treasury Department, IRS and Department of Labor issued Release 2020-57 which provides guidance on how small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees, under the Families First Coronavirus Response Act (Act).

The Release highlights that under the Act businesses with fewer than 500 employees can obtain necessary funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members. The Act will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways from Release 2020-57

Paid Sick Leave for Workers

For COVID-19 related reasons, employees can receive up to 80 hours of paid sick leave and expanded childcare leave when employees’ children’s schools are closed or child care providers are unavailable.

Complete Coverage

Employers receive 100% reimbursement for paid leave pursuant to the Act.

  • Health insurance costs are also included in the credit.
  • Employers face no payroll tax liability from paid leave.
  • Self-employed individuals receive an equivalent credit.

Fast Funds

Reimbursement will be quick and easy to obtain.

  • An immediate dollar-for-dollar tax offset against payroll taxes will be provided.
  • Where a refund is owed, the IRS will send the refund as quickly as possible.

Small Business Protection

The Act also provides that employers with fewer than 50 employees will be eligible for an exemption when inapplicability of the Act would jeopardize the ability of the business to survive. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. The Department of Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Easing Compliance

  • Requirements are subject to 30-day non-enforcement period for good faith compliance efforts.

Immediate Advantage of Paid Leave Credits

Businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Examples

The Release gives the following two examples for employers:

  • If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date
  • If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

State taxes

These changes have been made only on the federal level. Although states are working to make changes to their own laws, most states have not adopted comprehensive changes.