• Tax-Free Assistance: Qualified disaster relief payments received by individuals are excluded from gross income. No income tax, no payroll tax!
• Deductible Expense for Businesses: The payments are deductible by the employer and the employer has no payroll tax responsibility. 

1. Federal Declarations:Disasters declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
   1. Common Disasters: Hurricanes, floods, wildfires, earthquakes, tornados, and similar events often fall under this category once officially declared.
   2. National Emergencies: Situations like the COVID-19 pandemic, which was declared a national emergency.  This has now ended, but this was a widespread disaster example. 

• Expenses Must Be Necessary and Reasonable: They must relate directly to the qualified disaster.  They cannot be lavish or unnecessary. For example, a $20,000 stipend to an employee is likely unreasonable. 
• Personal, Family, or Living Expenses: This can include costs like temporary housing, hotels, AirBnB, home repairs, medical expenses, child care etc
• Not Otherwise Compensated: The reimbursement should not be covered by insurance or another source (gov't or FEMA assistance).
  
  

• Evacuation Costs: Lodging, meals, travel due to a disaster evacuation.
• Replacement of Personal Items: Clothing, appliances, or furniture destroyed in the disaster.
• Home Office Repairs: If a home office is damaged, repairs might qualify if they’re necessary for continued operation.
• Increased Utility Costs: Temporary power generation or extra costs related to disaster-caused outages.
  
  

WHAT DOES NOT WORK? Payments for lost wages, lost business income, drops in sales or compensation for economic loss do not qualify under IRC §139 and may be treated as taxable income.

1. Tax-Efficient Assistance to Employees (and Owners):
   • Recipients do not incur income tax on qualified payments.
   • The business (including an S-corporation, C-corporation, or partnership)  gets a deduction for the payments.
     
     
2. Flexible Use and Broad Application
   • Qualifying expenses under IRC §139 are broad, offering significant leeway in how assistance can be structured.
     
     
3. Reduced Red Tape:
   • Unlike some benefit plans, no formal written plan is strictly required by law BUT we do have a template below which we encourage biz owners to use for IRS audit protection.

Here are some pointers:

1. Same Treatment as Other Employees:
   • The owner (or family member) must qualify for the assistance under the same conditions as a typical employee.
     • The expenses must be disaster-related, necessary, and not compensated by insurance or other means.
       
       
2. No Excessive Payments!
   • Payment amounts must be reasonable for the claimed expenses. 
     
     
3. Documentation is Key
   • Maintain clear, written evidence of the qualifying expenses ( ex repair invoices, hotel receipts, relocation costs).
   • Demonstrate that the payment mirrors what any employee in a similar situation would receive.
     
     

Example: S-Corporation Owner Reimbursement

• Scenario: John is the 100% owner and an employee of an S-Corporation, “ABC Consulting.” A regional wildfire has been declared a disaster, causing John to evacuate his home.
  
  
• Expense: John incurs $2,500 in hotel and evacuation-related costs (lodging, meals, gas) that aren’t covered by insurance (key).
  
  

Payment and Tax Treatment

1. ABC Consultingreimburses John $2,500 under an IRC §139 policy.
   1. John is in a 24% marginal tax bracket (to keep is simple)
      
      

• $2,500 excluded from his personal income he pays zero federal income tax on it.
  • If he had received $2,500 as normal wages, he would have paid income tax plus FICA on that amount.
    
    

• The $2,500 payment is typically deductible as a business expense.
• Reduces the company’s pass-through income (which then may reduce shareholders’ individual tax liabilities, depending on S-Corporation flow-through details).
• No payroll taxes owed on the $2,500!