Here is a tax-planning opportunity for employers: offer your employees a reimbursement of Covid-related costs. The reimbursement will be fully deductible by you and tax-free to the employee.
IRC Section 139 allows employers to reimburse employees for necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster. Why is this important now? Covid-19 was declared a federal qualified disaster by President Trump on March 13, 2020. This means that employers can reimburse employees for Covid related expenses. The reimbursements are income free to the employees and treated as ordinary business expenses for the employer. Items included are the obvious such as masks, cleaning products, health care expenses, and funeral expenses for the death of a family member. But there are less obvious expenses that can be reimbursed like home office expenses (utilities, internet, computer purchases, home office furniture purchases). Also, child care and tutoring expenses can be reimbursed as well as plane tickets home or back to college for college students who were forced to come home during the pandemic. Furthermore, employers do not have to offer the reimbursements across the board to all their employees. For example, owners of S Corps can reimburse themselves for home office expenses they incurred due to Covid and take the expenses as business deductions. As always, documentation should be kept for the expenses, but there does not need to be any sort of plan in place for this.