COVID-19 Tax Deductions That You May Qualify For

The COVID-19 pandemic has activated provisions in the Internal Revenue Code (IRC) that could make you eligible for tax benefits for certain relief payments. Learn more about IRC Section 139 and other applicable tax credits.

Section 139 of the Internal Revenue Code (IRC) outlines rules and guidelines for disaster-relief payments. As COVID-19 continues to impact the economy, causing record unemployment numbers and business closures, this section of the tax code has been triggered.

Whether you’re an employer or individual, you could be eligible for certain tax deductions related to COVID-19. While the CARES Act has provided stimulus payments and other benefits to Americans and businesses, these additional tax credits offer further assistance for those struggling during the pandemic.

Here’s an overview of what you need to know about IRC Section 139, the FFCRA, and other tax credits related to COVID-19 that you could be eligible for.

Section 139 and FFCRA relief payments

Section 139 outlines how employers can handle relief payments to employees during a disaster. Applicable payments are those made to staff members who have been directly impacted by the pandemic. This compensation is deductible for the employer and will also be excluded from the worker’s income.

According to Section 139, a qualified disaster relief payment can include the following:

• Reimbursement or pay for reasonable and necessary personal, family, living, or funeral expenses incurred directly from COVID-19
  
• Reimbursement or pay for expenses to repair or rehabilitate a personal home or its contents, which are attributable to the pandemic

Qualifying payments will be free of income, payroll, and self-employment taxes.

Note that emergency relief payments made to employees from charitable organizations are covered under Section 139. This means that if a business makes disbursements through a controlled private foundation and other applicable guidelines are followed, payments will be tax-free. 

The Families First Coronavirus Response Act (FFCRA) outlines how employers can provide paid sick leave or family and medical leave related to COVID-19. If eligible, business owners can claim tax credits on these leave payments made to employees if they had to take time off work because of COVID-19. These provisions are in place from April 1, 2020, to December 31, 2020.

Eligible employers are businesses with fewer than 500 employees, and those required to pay qualified sick leave wages or family leave wages under the FFCRA.

The FFCRA covers employees for: 

• Two weeks or 80 hours of paid sick leave at the same rate of pay if the employee is quarantined or experiencing COVID-19 symptoms
  
• Two weeks or 80 hours of sick leave at two-thirds of their pay if they need to care for an individual who must quarantine or take care of a child who cannot attend school normally

Other COVID-19 tax benefits

If an individual has experienced significant impacts from COVID-19 and has an IRA, they can borrow up to $100,000 from the account and pay it back within three years of the date of withdrawal. This can all be done as if it is a tax-free rollover. There is also no limit on what can be done with the funds during the three years.

Another credit applicable to employers is the employee retention credit. This tax break encourages employers to keep their workers on the payroll during the pandemic. The credit is 50% of up to $10,000 in payments made by an employer impacted by COVID-19. Eligible employers include those whose business is wholly or partially suspended, or whose gross receipts are less than half of the comparable quarter in 2019. Once the receipts reach above 80% of the comparable quarter in 2019, they no longer qualify.

Additionally, the CARES Act allows for deferment of employment payroll taxes. Both self-employed workers and employers can defer social security tax to be paid at the end of 2021 and 2022.

Work with a tax professional to understand COVID-19 deductions

Still have questions about tax deductions related to COVID-19? These changing regulations can be complicated and confusing. Work with a tax professional who can ensure that you’re paying the least amount of tax legally possible. You must always be sure that you’re complying with all applicable laws while taking advantage of any deductions and credits for which you qualify.

The team at Provident CPA & Business Advisors is here to help you during this time of uncertainty and financial distress. If your business is seeing impacts from the pandemic, contact us to find the best way forward. We can help you focus on growth and profit improvement in addition to accounting and tax considerations.