Harvey Victim Relief — Tax Treatment

Posted by lgtcpa on Sep 20, 2017

Source: "Employer Sponsored Disaster Relief Benefits" by Postlethwaite & Netterville ("P&N")

HOW EMPLOYERS CAN HELP EMPLOYEES

Many employers are now looking for ways to help employees in the wake of this crisis. A few ways employers can help employees include: 

Direct Giving to Employee

This generally refers to payments made to an employee to cover disaster-related expenses not reimbursed through insurance or otherwise.

Employer-Sponsored Donor Advised Funds

This refers to a fund created by employers, generally as part of a larger community foundation or public charity, to assist employees with disaster-related expenses.

Employer-Sponsored Public Charity

A public charity established by an employer to provide assistance in response to a disaster or other employee-hardship situation.

 

TAX CONSEQUENCES

Before establishing employee disaster benefits, employers should understand the tax consequences to both employers and employees as a result of employer contributions. Below are a few tax consequences to consider:

  1. In the case of direct giving, payments that are “qualified disaster relief payments” are excluded from the employee/recipient’s gross income and deductible by the employer to the same extent if the payment were included in recipient's gross income.
  2. With respect to employer-sponsored donor advised funds, payments that meet certain requirements (discussed in detail below) are excluded from the employee/recipient’s gross income as gifts. Furthermore, if the employer-sponsored donor-advised fund is organized for the purpose of providing relief from qualified disasters and follows objective guidelines when giving to employees, the donation will not run afoul of rules prohibiting donor-advised funds from making grants to individual persons.
  3. With respect to employer-sponsored public charities, payments that meet certain requirements (discussed in detail below) are excluded from the employee/recipient’s gross income as gifts.  Furthermore, if the employer-sponsored public charity follows objective guidelines when giving to employees, the donation is considered to be for charitable purposes, the organization will retain its tax exempt status, and regular deductibility rules will apply.

 

Direct Giving

One way that employers can help employees in times of a disaster is direct giving to employees.  Generally, all amounts received by an employee from an employer are included in gross income.  However, I.R.C. § 139 allows employers to contribute to employees in the wake of “qualified disasters” in a manner that is tax-free to the recipients.  For purposes of this statute, a “qualified disaster” includes, in relevant part, a federally declared disaster. Pursuant to I.R.C. § 139, gross income does not include any amount received by an individual as a qualified disaster relief payment even if paid by an employer. For this purpose, “qualified disaster relief payment” includes an amount paid to or for the benefit of an individual:

  1. To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result a qualified disaster;
  2. To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster;
  3. By a person engaged in the furnishing or sale of transportation as a common carrier by reason of death or personal physical injuries incurred as a result of a qualified disaster, or;
  4. If such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof in connection with a qualified disaster in order to promote the general welfare.

Importantly, however, “qualified disaster relief payments” do not include payments for expenses otherwise paid for by insurance or other reimbursements nor do they include income replacement payments, such as lost wages, lost business income, or unemployment compensation.

In addition to the tax benefit to employee/recipients for excluding such payments from gross income, employers are permitted to deduct the amounts paid as qualified disaster relief payments to the same extent they would be if such payments were includible in gross income.

In this case, the current Texas flooding has been declared a federal disaster.  As a result, employers who give amounts that meet the requirements for “qualified disaster relief payments” will be able to deduct those amounts for tax purposes while the amounts received by the employees will be excludible from gross income, to the extent that those same expenses are not otherwise compensated for by insurance/other means.

 

Employer-Sponsored Donor Advised Funds

Employers may also be able to help employees affected by disasters through donations to employer-sponsored donor advised funds.  In general, a donor-advised fund is a fund that is established with a sponsoring organization, generally a public charity (e.g., a community foundation), where the contributions by the donor are separately identified and with respect to which the donor can advise on how the money should be used.

Donations to donor advised funds are generally eligible for a charitable deduction if certain eligibility requirements are met.  Donor-advised funds are generally not allowed to make grants to individual persons. In certain circumstances, however, employer-sponsored funds or accounts can make grants to employees and their family members. In order for the employer-sponsored donor advised fund to be able to make charitable donations to employees, the following criteria must be met:

  1. The fund serves the single identified purpose of providing relief from a qualified disaster as defined by I.R.C. § 139 (e.g.,  a federally declared disaster);
  2. The fund serves a charitable class;
  3. The recipients of the grants are made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous;
  4. No payment is made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or public charity, or members of the fund’s selection committee; and,
  5. The fund maintains adequate records to demonstrate the recipients’ need for the disaster assistance provided.

These records should show type of assistance provided, criteria for disbursement, date, place, estimated number of victims, charitable purpose intended, and the cost of aid.

In this case, as this Texas flooding has been declared a federal disaster, employers may also be able to contribute to their employees in this time of need by using an existing donor-advised fund set up for this purpose or setting up a new donor-advised fund with a local public charity.  If the above requirements are met, then the donation to the employee should be excludible from income while the donations to the fund should be deductible to the donors.

 

Employer-Sponsored Public Charities

Like employer-sponsored donor-advised funds, employers may also aid employees through the use of an employer-sponsored public charity.  In general, public charities are those entities who meet the requirements for tax exemption under I.R.C. § 501(c)(3) and who meet the qualifications for being a public charity pursuant to I.R.C. § 509(a).  In general, donations to public charities are deductible pursuant to general charitable deduction rules and donations received by individuals are excluded from gross income as gifts.

In the employer-employee context, employers can establish employer-sponsored public charities to provide assistance in disaster or other employee-hardship situations as long as the employer does not assert “excessive control” over the charitable organization.

For more information about disaster tax relief see the below information:

IRS Publication on Disaster Relief

Notice 2017-48

Disaster Relief Payments

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Topics: Accounting Tips, Tax, Financial, hurricane harvey, IRS, disaster, relief