Section 139 Allows for Some Payments to be Tax-Free and Tax Deductible

A pen resting by the signature line of a tax form.

After the terrorist attacks on September 11, 2001, Congress added a little-known tax provision to the tax law. This provision exempts certain payments from taxation during a disaster or terrorist attack.

President Donald Trump’s national emergency declaration triggered the disaster provisions of the tax law, including this one—where both you and your employees can reap benefits during this COVID-19 pandemic.

How This Works

Because of the pandemic, the tax code makes the following tax-free to your employees:

  • Payments they receive from you for necessary personal, family, living, or funeral expenses incurred because of COVID-19
  • Payments they receive from you for reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence, or for the repair or replacement of its contents, to the extent that the need for such repair, rehabilitation, or replacement is attributable to COVID-19

The qualified COVID-19 disaster relief payments are free of income tax, payroll taxes, and self-employment tax.

Payments That Do Not Work

The exclusion from income does not apply to payments in the nature of income replacement, such as payments to individuals for lost wages, unemployment compensation, or payments in the nature of business income replacement.

Payments to business entities do not qualify, either.

Qualified disaster relief payments do not include payments for any expenses compensated for by insurance or otherwise.

Payments You Can Make

Here is an example: the IRS ruled that grants received by employees under an employer program to pay or reimburse reasonable and necessary medical, temporary housing, or transportation expenses incurred as a result of a natural disaster qualify for this benefit.

With respect to the COVID-19 pandemic, you could reimburse or pay for the following employee expenses under this guidance:

  • Out-of-pocket medical not covered by health insurance
  • Teleworking costs, such as a computer, office equipment, telephone, and supplies
  • Funeral costs for an employee or an employee’s family member
  • Childcare costs to allow employees to continue to work while their children are home from school

Under the Tax Cuts and Jobs Act, employees may not deduct employee business expenses during tax years 2018-2025, so your reimbursement of such expenses under the disaster rules is extra valuable.


Although Section 139 of the Code does not require employers to adopt a written plan or policy to make qualified disaster payments, employers who desire to make qualified disaster payments on account of COVID-19 should consider, as a best practice, establishing a written plan or policy.

This written plan should include:

  • Starting and ending dates of the program
  • A list of the expenses you will pay or reimburse
  • A procedure the employee will use to request funds
  • The maximum payment per employee
  • Maximum total payments through the plan

You should also track the names and amounts provided to each employee under the program terms.


During the COVID-19 pandemic, you establish a plan to help employees with telework expenses, allowing each employee up to a $1,500 reimbursement for equipment, supplies, and use of home utilities.

Your employees, Sam and Helen, each apply for relief and spend approximately $1,500 on telework equipment and supplies.

The tax results are as follows:

  • You get a $3,000 tax deduction.
  • Sam gets $1,500 completely tax-free.
  • Helen gets $1,500 completely tax-free.

If you have any questions or would like to discuss this further, please contact us.

You can stay up to date on many of the relief options and their tax implications as they relate specifically to independent pharmacies through our coronavirus advisory page.



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