Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
In the wake of the COVID-19 pandemic, charitable organizations, employers, individuals, and other entities are looking for ways to provide aid to those affected. Those who want to provide financial assistance or grants to individuals or businesses should be aware of tax laws and guidance from the IRS to ensure that the grants do not result in adverse tax consequences for either the organization providing the benefit or the recipient.
As a result of the declaration of a nationwide emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988, COVID-19 is treated as a "qualified disaster" for a number of different tax purposes, including provisions relating to the tax treatment of "qualified disaster relief payments." This opens up additional opportunities to help individuals and businesses.
The applicable rules depend upon the nature of the payor, the specific purpose of the payment, and the recipient. Payments may be made by charitable organizations, employers or other non-exempt entities. If payments are made by a charitable organization, the rules depend upon whether the organization is a public charity, donor advised fund, or private foundation. Whether the payments are excluded from the taxable income of an individual or business depend upon the payor and the nature of the payment. Opportunities for employers and charitable organizations to assist individuals are briefly described below.
Employer Benefits
Because COVID-19 is a qualified disaster, employers can provide qualified disaster relief payments which include reimbursement or payment of reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the pandemic. Examples of these types of payments could include medical expenses or additional expenses that are incurred due to teleworking or shelter in place requirements. In contrast, wage replacement payments would not be included. Payments that meet the definition of a qualified disaster relief payment are not taxable to the employee.
Charitable Organization Aid to Individuals
Charitable organizations that provide benefits to individuals must ensure that the payments fulfill a charitable purpose and are not payments that result in a private benefit. The rules for disaster relief payments were written based on more typical disasters, such as floods or hurricanes, so novel issues will likely arise as organizations determine the appropriate ways to provide relief in this crisis. Organizations should establish criteria and procedures to ensure that benefits, outside of the immediate needs of food, shelter, and medical care, are being provided based on an objective determination of need. Employer-sponsored organizations that provide benefits to employees have additional restrictions and compliance requirements to ensure that they are not providing impermissible benefits to the employer.
Charitable Organization Aid to Businesses
The economic impact of this crisis has also raised questions about when it is appropriate for charitable organizations to provide aid to commercial businesses. Relief provided to businesses raises additional concerns regarding private benefit; however, the IRS has determined that organizations can provide aid to businesses so long as the payments advance the charitable goals of the organization and do not provide more than an incidental private benefit. The IRS has also provided that lessening the burdens of government can be a charitable purpose for providing aid to businesses, which may be particularly relevant in this situation.
As this unique situation develops, many organizations or employers may want to consider providing benefits that they have not provided in the past and should be aware of both the opportunities and limitations in providing assistance to individuals and businesses. If you would like assistance in developing a relief program that meets your objectives and maximizes tax benefits, please feel free to contact us.
Additional Resources
- IRS Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations
- The IRS has established a special section of its website focused on steps to help taxpayers, businesses and others affected by COVID-19. The IRS website will be updated as new information is available.
