Did you know that companies can assist their employees affected by Hurricane Harvey in a tax-advantaged way?
If you are a business owner, or a consultant with an LLC or a sole proprietorship, you can make payments to your employees affected by Harvey, yourself included, which will not be subject to income or payroll tax. Section 139 of the Internal Revenue Code specifies the types of payments that are eligible for this favorable tax treatment. These payments are called Qualified Disaster Relief Payments (QDRP).
A QDRP is defined as a payment made to an employee to reimburse living expenses, repair of a personal residence or replacement of its contents, or any additional expenses that were incurred as a result of Hurricane Harvey. A QDRP allows business owners and consultants who were affected by Hurricane Harvey to make cash distributions intended to help mitigate repair costs and avoid income tax consequences.
This can be a very strong tax planning tool, but there are associated restrictions that must be considered. The IRS establishes a few caveats for these payments. First, these disaster relief payments are excludable "only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise," (IRC Section 139(b)). Expenditures must not be subject to insurance coverage to qualify for relief payments.
Secondly, employees who receive disaster relief payments cannot claim any deduction or credit for disaster related expenditures if they received these payments from their employers for those same expenditures. This is termed the Denial of Double Benefit (IRC Section 139(h)). Lastly, and perhaps most importantly, all employees of the company must be offered these reimbursements. Length or type of service with the company, salary, or job grade cannot affect QDRP distributions.
For an individual in this position, using IRC section 139 to receive assistance is the best option. Your company can claim the QDRP as a deduction, and you, as an employee of your company, are not subject to federal or employee taxes upon distribution. In addition, you are not required to provide receipts or verification of value to the IRS when making claims under section 139. This rule applies to all hurricane-related expenses, from automobiles, to movers, to apartment rent payments.
QDRP disbursements can be particularly valuable to consultants and small business owners that were financially impacted by Hurricane Harvey. However, we strongly recommend that you consult your CPA or a tax professional before taking any action.
If you have any questions or would like more information, please feel free to reach out to our team.
Willis Johnson, CFP®
President and CEO
