Tax Lawyers Can Fight the Coronavirus Crisis with the Internal Revenue Code

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Today, we welcome guest blogger Bob Rubin. Bob practices in Sacramento, California as a partner in Boutin Jones, Inc. While he primarily focuses on tax procedure in both federal and state matters, he gets involved in other tax issues as well. Today, he writes about a possible use of one of the disaster provisions passed by Congress at an earlier time to protect workers today. He and I started working in the same branch of Chief Counsel, IRS 43 years ago this month. Keith

Under section 139, gross income does not include any amount received by an individual as a qualified disaster relief payment. A qualified disaster relief payment is one of four types of payments made to, or for the benefit of, an individual, but only to the extent any expense compensated by the payment is not otherwise compensated for by insurance or otherwise. The first and most relevant type of payment is any amount paid to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. President Trump’s Stafford Act Declaration for New York, California and Washington made section 139 applicable.

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The section 139 grants are not income to the employee/grantees, are not subject to employment taxes, are deductible by the employer/grantor and are not subject to information reporting under section 6041. The section 139 plan cannot discriminate based upon length of service or position. The grant cannot be in the nature of income replacement.

Besides section 139, see J. Comm. on Taxation, Technical Explanation of the Victims of Terrorism Relief Act of 2001, JCX-93-01 (Dec. 21, 2001) and Revenue Ruling 2003-12.  This is situation 3 in the revenue ruling:

Situation 3. Employer R makes grants to its employees who are affected by the flood described in Situation 1. The grants will pay or reimburse employees for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise. R will not require individuals to provide proof of actual expenses to receive a grant payment. R’s program, however, contains requirements (which are described in the program documents) to ensure that the grant amounts are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary medical, temporary housing, and transportation expenses R’s employees incur as a result of the flood. The grants are not intended to indemnify all flood-related losses or to reimburse the cost of nonessential, luxury, or decorative items and services. The grants are available to all employees regardless of length or type of service with R.

Section 139 allows employers to assist employees who cannot meet their personal living expenses such as rent, mortgage payments or car payments on a tax-efficient basis. There should be a section 139 plan document that provides the benefits are payable without regard to length of service or position. The plan should require some type of modest substantiation such as a copy of a lease and a signed statement providing that the grantee cannot afford to pay $X of the rent.

California conforms to the income tax provisions of section 139. Employment taxes in California are administered by the California Employment Development Department (“EDD”). EDD Information Sheet State of Emergency or Disaster provides that section 139 grants are not subject to Personal Income Tax Withholding, but are subject to Unemployment Insurance contributions, the Employment Training Tax and State Disability Insurance contributions.

Many employees are being furloughed because they cannot work from home. Others are being furloughed due to a decline in economic activity. Section 139 is a tax-efficient tool employers can use to soften the blow on employees.

In addition to Bob’s thoughts on this subject, we have also gathered thoughts from Omeed Firouzi. Omeed is an ABA Tax Section Christine Brunswick fellow who works with Philadelphia Legal Aid specializing in employment tax issues of low income taxpayers. He prepared this for people working with individuals who receive Form 1099 wages summarizing the FFCRA provisions. Keith

SICK LEAVE for 1099 worker

The credit for COVID-19-related sick leave is 100% of the self-employed person’s “sick-leave equivalent amount” if they themselves are self-quarantined/diagnosed. It is 67% of the SE person’s “sick-leave equivalent amount” if the SE taxpayer is “taking care of [their] child following the closing of the child’s school.”

The “sick-leave equivalent amount” = *to take care of yourself,* the lesser of 1) your average daily SE income or 2) $511 per day for up to 10 days (up to $5,110 in total) OR to *care for a sick family member or your child following the child’s school closure,* $200 per day for up to 10 days ($2,000).

Daily self-employment income in FFCRA is defined as the net earnings for the year divided by 260 (i.e. 260 days).

FAMILY LEAVE for 1099 worker 

The COVID-19-related “emergency family-leave credit” – eligible for up to 50 days – is 100% of the SE taxpayer’s “qualified family leave equivalent.”

The “qualified family leave equivalent” = the lesser of 1) $200 or 2) the average daily SE income for the taxable year per day. As MarketWatch put it, “the maximum total family-leave credit would be $10,000 (50 days times $200 per day).” The House Appropriations Democrats summarized it such that “in calculating the qualified family leave equivalent amount, an eligible self-employed individual may only take into account those days that the individual is unable to work for reasons that would entitle the individual to receive paid leave pursuant to the Emergency Family and Medical Leave Expansion Act.”

Further, there is no “double benefit” allowed for both of these credits. So these credits are “proportionally reduced for any days that the individual also receives qualified sick leave wages from an employer,” so this is especially relevant for our clients who work both W-2 and 1099 jobs simultaneously. (https://appropriations.house.gov/sites/democrats.appropriations.house.gov/files/Families%20First%20Summary%20FINAL.pdf). The statute specifically states that in such a scenario, “your self-employed equivalent benefit ‘shall be reduced (but not below zero) to the extent that the sum of the amount described…exceeds $2,000 ($5,110 in the case of any day any portion of which is paid sick time described in paragraph).”

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