Last week’s blog post discussed the home office tax deduction and burst the bubble for many who were working at home for months under COVID-19 restrictions. Unfortunately, as discussed in that earlier post, this tax break cannot be used by an individual who is an “employee” as opposed to “self-employed”. This restriction is a result of tax law changes enacted in 2017. Under the newer rules, an “employee” is no longer able to benefit from the home office deduction at all, even if the work from home is carried out on a full time basis. A taxpayer must have self-employment income to benefit from the home office deduction. “Self-employed” individuals such as free-lancers or sole proprietors are able to deduct some home office expenses. Read the earlier post for the details.
Is there a Workaround for “Employees”? Maybe!
There may be a little known tax-free way for employers to pay or reimburse their employees for certain costs incurred during a disaster that typically would not be eligible for tax-free treatment. These costs could possibly include those paid for child care and tutoring services due to school closures, commuting costs, as well as expenses incurred to allow the employee to work from home (for instance, the cost of a personal computer, printer, supplies, internet service). Personal and family expenses are also within the realm of permissible payments. Let’s explore this possible workaround a bit more!
Internal Revenue Code to the Rescue
Given the hardships wrought by the COVID-19 pandemic, we are in dire need of good things. Sometimes, the tax laws do good things. This may be one of those times.
Internal Revenue Code Section 139 permits tax-free relief payments reimbursing or paying an individual for certain expenses in connection with a “qualified disaster”. These can be received without income or employment taxes provided that the payment is not otherwise compensated for by insurance or otherwise. A “qualified disaster relief payment” includes any amount paid by an employer to or for the benefit of an employee to reimburse or pay “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster.
What is a “Qualified Disaster”?
We all know that COVID-19 is a disaster. However, it has to be “qualified disaster” in order to help an employee receive amounts on a tax-free basis from his or her employer. A “qualified disaster” is a defined term under the tax laws and includes a “federally declared disaster” as stipulated in Code section 165(i)(5)(A). As defined in that section, 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. COVID-19 was declared a disaster under the Stafford Act by President Trump on March 13, 2020.
COVID-19 Related Payments from a Foreign Employer
Can a foreign employer pay a”qualified disaster relief payment” to an American working overseas? I think the answer to that question is “yes”. Americans abroad working for foreign employers may be eligible for the Code Section 139 tax break in the same manner as their Stateside counterparts. In March, President Trump announced COVID-19 a “federally declared disaster”, as required for Code Section 139 eligibility.
Revenue Ruling 2003-12, applies Code Section 139 to reimbursements by an employer for an employee’s medical, temporary housing and transportation expenses related to a flood. Aside from this Ruling, there is no other IRS guidance indicating how Code Section 139 should be applied. Legislative history issued by the Joint Committee on Taxation (Technical Explanation Of The “Victims Of Terrorism Tax Relief Act Of 2001,” As Passed By The House And The Senate On December 20, 2001-93-01, JCX-93-01) when Code Section 139 was added to the Internal Revenue Code indicates Congress’s intent that qualifying expenses might include expenses for:
- Rent, water, utilities and other expenses of maintaining a household
- Travel away from home (e., transportation, meals, lodging)
- Medical expenses that would be deductible under Code Section 213
- Child care expenses
Documentation requirements are highly relaxed. While Code Section IRC 139 does not require an established written plan to be implemented by the employer, it is highly recommended that both the employer and employee keep track of any payments made or received under this provision and document how these payments relate to expenses incurred due to the pandemic. Americans abroad working for foreign employers should take the lead on this issue, since many foreign employers may not require or keep records that may be needed by the employee if questioned by the IRS. I can help you with such preparation.
Given the COVID-19 pandemic, diligent tax professionals should be looking to Section 139. It may be a possible method to claim tax-free supplemental assistance for clients who are employees receiving amounts from employers to cover certain expenses brought on by COVID-19. The permissible monetary assistance is broader than those related to work – it can cover “reasonable and necessary” personal, family, living, or funeral expenses wrought by the pandemic. Definitely an area worth further exploration!
Contact me for assistance to ensure your tax situation is handled in the best possible way with such COVID-19 related issues. Working with my tax colleagues around the globe, we find innovative solutions in these challenging times.
Posted: June 25, 2020
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