The Federal government has recently taken a series of actions concerning the novel coronavirus disease (COVID-19). We discuss the tax implications of these decisions.
On March 13, 2020, President Trump signed a Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”).
By invoking the Stafford Act, the President provides the Internal Revenue Service (IRS) and US Department of the Treasury (the “Treasury”) significant authority to offer tax relief to those in federally designated disaster areas. While it is not uncommon for a state or locality to be designated as an emergency or disaster area, the severity of the COVID-19 outbreak has required a national response. The President’s declaration has led the Federal Emergency Management Agency (FEMA) to declare an emergency in every state, territory and certain tribal lands. A list of each declaration is available on FEMA’s website and will be updated as more specific forms of relief are authorized.
After FEMA has designated an area as an emergency or disaster area, federal agencies may approve forms of individual and public assistance. The Internal Revenue Code (“Code”) provides the IRS unique discretion in a “federally declared disaster.” A federally declared disaster includes any disaster subsequently determined by the President to warrant assistance under the Stafford Act. Code Sections 7508A and 139 are the primary provisions regarding disasters, although several other provisions may also be invoked. These provisions should be effective provided the COVID-19 emergency constitutes a disaster within the meaning of the Code. Code Section 7508A allows the IRS to extend tax return filing deadlines, extend tax payment deadlines, and waive penalty and interest charges for individuals impacted by a disaster. Treasury Secretary Steven Mnuchin appears to have exercised this authority on March 17, 2020, by authorizing the deferral of up to $1 million in tax payments for individuals and $10 million for corporations without incurring penalties or interest charges. Code Section 139 excludes qualified disaster relief payments from a taxpayer’s gross income. Qualified disaster relief payments include reimbursement for reasonable and necessary personal, family, living or funeral expenses incurred because of a disaster, as well as payments by state and local governments in order to promote the general welfare. The legislative history indicates they do not include payments in the form of income replacement. Further, Rev. Rul. 2003-12 clarified that otherwise eligible payments made by an employer to their employees could qualify under Section 139. Employers may be able to deduct assistance payments as ordinary and necessary business expenses.
A day after the President’s declaration, the House of Representatives passed H.R. 6201: Families First Coronavirus Response Act. The current text of the bill would provide tax credits for paid sick and paid family and medical leave.
Practice Point: Much of the impact of the President’s declaration, particularly under Code Section 7508A, can only be determined after the IRS and the Treasury decide how to utilize their discretion. However, if their employees are impacted by COVID-19, employers may wish to evaluate whether their planned assistance qualifies under Section 139 and thus will not result in their employees recognizing any unanticipated gross income.