California Wildfire Update – How It Affects Your Finances

Employers May Provide Tax-Free Relief To Employees Hit By Storm, Attorney Says

Employers can provide benefits, tax-free, to employees who are victims of a federal natural disaster under tax code Section 139 and Internal Revenue Service guidance.
Section 139 provides that, in the case of a presidentially declared disaster, an employer can give cash or benefits to assist employees. The payments are exempt from federal income tax and employment taxes, no substantiation is required from the employees, and the employer is able to deduct the payments, Ruth Wimer, a partner at McDermott Will & Emery in Washington, D.C., told BNA.
“There is essentially no administration involved for the employer to be able to take advantage of this type of plan,” she said.
Wimer said the ease in providing relief to employees makes it very attractive to employers and “thus fulfills the role of Congress in enacting this relief.” In considering whether to provide disaster relief for employees in a designated area, employers should consider who will be covered under the program and the period of coverage, Wimer said.
The Victims of Terrorism Tax Relief Act added Section 139 to the tax code in 2001. Section 139(a) provides that gross income does not include any amount received by an individual as a qualified disaster relief payment.
Qualified Disaster Relief Payment Defined.
Section 139(b) defines, in part, “qualified disaster relief payment” to mean any amount paid to or for the benefit of an individual:
• to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster;
• to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence; or
• to reimburse or pay reasonable and necessary expenses incurred for repair or replacement of the contents of a personal residence, to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

A personal residence can be one that is rented or owned, according to IRS Publication 3833.
In addition, Section 139(b)(4) provides that a qualified disaster relief payment also can be an amount 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.
In Revenue Ruling 2003-12, IRS said the exclusion for payments made under Section 139(b)(4) is in addition to the administrative general welfare exclusion for certain disaster relief payments to individuals, citing earlier revenue rulings relating to payments from social benefit programs.
Under Section 139(b), the amounts will be excluded from income only to the extent that any expense compensated by the disaster relief payment is not compensated for by insurance or otherwise.
Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation are not qualified disaster relief payments.
Qualified Disaster Defined.
In general, Section 139(c) provides that the term “qualified disaster” means:
• a presidentially declared disaster (defined generally, as a disaster in an area that has been subsequently determined by the president to warrant federal assistance under the Disaster Relief and Emergency Assistance Act),
• a disaster resulting from any event that is determined by the secretary of the treasury to be of a catastrophic nature,
• a disaster resulting from terrorist or military actions, or
• a disaster resulting from an accident involving a common carrier.

Rev. Rul. 2003-12 quotes the Joint Committee on Taxation’s Technical Explanation of the Victims of Terrorism Tax Relief Act of 2001 to explain why there is no substantiation requirement connected to receipt of the relief.
According to the technical explanation, because “of the extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify for the [§ 139] exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.”
In the revenue ruling, IRS builds on this explanation by providing three situations in which payments to disaster victims are analyzed for their exclusion under Section 139.
For employers, the pertinent example is Situation 3. In Situation 3, IRS said, “Payments that employees receive under an employer’s program to pay or reimburse unreimbursed reasonable and necessary medical, temporary housing, or transportation expenses they incur as a result of a flood are excluded from gross income under section 139.”
In addition, the revenue ruling held that amounts that are excluded from gross income under Section 139 are not subject to information reporting under Section 6041

For more information about how you may be financially affected by the California Wildfires, contact Tim Mayclin, CPA, an accountant serving Santa Rosa CA and the Sonoma County.

For those that suffered a loss due to the fires in California

Property taxes. Temporary property tax reductions are available for homes destroyed or damaged by fire. The property owner must apply to the County Assessor within one year from the date of the fire for tax relief.

This relief is available for all property where value is reduced more than $10,000 by a fire, not just property in the wildfire areas.

For people who live in counties where Governor Brown has declared a state of emergency, fire victims can apply for a deferral of their next property tax payment without penalties or interest. To date, this list includes Butte, Lake, Napa, Nevada, Orange, Solano, Sonoma, and Yuba counties.

The Sonoma County Assessor announced, working with CAL Fire and local fire departments, it will reduce taxes for damaged properties without taxpayers needing to apply. It hopes to have corrected 2017-2018 property tax bills to property owners by Dec. 11, 2017. In Sonoma County, affected taxpayers will have a 30-day deferral period following receipt of a corrected tax bill. Taxpayers with impound accounts should contact their lender to inform them of the change in status of their property.

Mortgage payments. Mortgage payments are still due for a destroyed or damaged home. But, most lenders will give a 90-day postponement of payments. Contact the lender for assistance.