Tax Benefits in Times of Disaster
Written by: Shawn Burman, CPA, Tax Manager, Faragalla and Associates, LLC
*We are currently in a state of emergency yet are anticipating a federal disaster declaration in the upcoming weeks. This article is preemptive tax planning for your business and we want to hear from you if you are compensating employees during times of not working.
Businesses making payments to employees who aren’t working need to reevaluate whether these are payments for services rendered or Qualified Disaster Payments. If you are helping an employee with personal, living, and family expenses you may be able to save money on payroll and income taxes – providing both immediate and future tax savings.
The President’s declaration of a National Emergency under the Robert T. Stafford Disaster Relief Act opens up a section of the tax law to help provide tax relief for individuals and businesses alike. IRC 139 gives tax breaks to businesses and individuals who make and receive payments and are located in federally declared disaster areas. There are two types of disaster relief payments: Qualified Disaster Relief Payments and Qualified Disaster Mitigation Payments. Each has their own unique circumstances detailed throughout this article.
What is a Qualified Disaster Relief Payment?
A qualified disaster relief payment can be an unsubstantiated yet reasonable payment to an employee to:
- reimburse or pay for reasonable and necessary personal, family, living, or funeral expenses;
- to reimburse or pay for reasonable and necessary expenses incurred to repair or rehabilitate a personal residence;
- by a person engaged in the furnishing or sale of transportation as a common carrier, due to the death or personal physical injuries resulting from a qualified disaster; or
- if such amount is paid by a federal, state, local government, agency, or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.
Qualified Disaster Mitigation Payment Defined:
Qualified disaster mitigation payment means any amount which is paid pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act to or for the benefit of the owner of any property for hazard mitigation with respect to such property.
So, What Does This Mean For My Business?
Disaster Relief Payments
Businesses need to evaluate their employee status and whether they are making payments for services rendered or to assist with personal, family, and living expenses during this time. If the latter, you should speak with your tax advisor about the ability to stop making these as wage payments and instead consider them as Qualified Disaster Relief Payments. Your business will receive a deduction against income for any payments made, will be relieved of payroll taxes, and the employees will not need to pick up the income on their tax return.
Additionally, closely held corporations with shareholder-employees have the unique ability to make Disaster Relief Payment to owners which can provide some immediate and future financial relief.
Disaster Mitigation Payments
There will be some monetary relief as a result of the President’s declaration of a National Emergency under the Robert T. Stafford Disaster Relief Act. If you sustain financial damages during this time this act will ensure that you are not required to include the income received as a result of this act as income for tax purposes.
Denial of Double Benefit:
Many taxpayers who qualify for disaster area tax relief also make claims for casualty losses. The IRS specifically prohibits double dipping when it comes to disaster relief payments and employer casualty loss deductions. Therefore, any amounts deducted under the casualty loss provisions are not eligible for a disaster relief payment deduction as well.
Business owners need sound professional advice when it comes to finding light at the end of this tunnel. These provisions will help certain businesses with employee retention, current cash flow, and future tax relief. Please contact your tax professional to see if these laws can help your business.
Faragalla and Associates is a full-service public accounting firm in Frederick Maryland specializing in caring about our clients. We look for both preexisting and new legislation that can benefit our clients while maintaining a local firm culture.
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