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If you’re unfamiliar with Section 139 Disaster Relief, you’re in the right place. In this post, we recap a recent presentation from Jackie Meyer with everything you need to know.
Here is a quick overview of what Jackie covers in her presentation:
- An introduction to Jackie
- Overview of Section 139
- Case study example
- Considerations for the business
- How to value price this engagement
- Steps to easily implement
Let’s get started!
Meet Jackie Meyer
Jackie has been a CPA firm owner for over a decade. Several years ago she converted to value-based pricing and since then she’s been able to triple her revenue and equally decrease the amount of time she spends working on her firm.
She also started a coaching business, Certified Concierge Accountant, and created TaxPlanIQ, which is a web app that shows ROI in tax planning. Her web app can be used to determine value when you implement Section 139.
Overview of Section 139
Section 139 is a tax code that was enacted after 9/11 and enables businesses to deduct assistance to individuals due to pandemic, out-of-pocket costs. There is little official guidance for this, meaning you’ll have to decide as a firm the best way to implement and advise your clients.
Essentially, it allows your business to deduct reimbursements for personal pandemic costs of your team without running it through payroll or being taxed on income. Qualified expenses can include:
- Medical expenses
- Home quarantining expenses
- Home office expenses (that you aren’t already deducting)
- Child care
- Home care
- Health-related expenses
- Mental health and physical well-being
- Transportation expenses
Things that are not included in Section 139:
- Items covered by insurance
- Nonessential items
- Payments for lost income or compensation
- Payments made without connection to the Covid-19 Qualified Disaster
- Payments made for employee expenses which pre-date Covid-19
Who is this for?
Business owners, their team, and potentially others.
What is it?
A business deduction for items that may not normally be deductible.
When is it available?
During a nationally declared pandemic. In some local disasters, it can also be applied. The deduction can be applied as long as the country is still in a nationally declared disaster, meaning if you claimed in 2020, you can still claim in 2021 and 2022.
Where is it available?
Nationally or smaller areas that might need help.
Why do we care?
The recipient does not record it as taxable income which saves income and payroll taxes for those related expenses.
Section 139 is a non-accountable plan, meaning nothing has to be documented, however, it is recommended. While there isn’t a whole lot of direction for applying this, it is clear that it needs to fall under an ordinary business expense.
Case Study Example
Jenny is the sole owner of an S-corporation. Due to the pandemic, her kids are still in remote school and she is still working at home, not her office. She’s incurred plenty of additional expenses including:
- iPads and desks for her kids
- Homeschooling supplies
- Increased utilities
- Increased child care costs
- Home gym fitness training/classes
- Covid doctor fees
Her expenses total $17,000 and she wants to give a $1,000 stipend to 10 of her employees. She can deduct all $27,000 as a business expense and she and her employees do not have to claim it on their personal returns. The S-corp can reimburse Jenny for $17,000 of those expenses once she signs the attorney-approved acknowledgment letter. When it’s all said and done, Jenny will be saving roughly $10,000 in taxes!
Considerations for the Business
Expenses need to be reasonable. The recipient of the funds should acknowledge they are reasonable.
Section 139 is not subject to discrimination rules. The accountant needs to exercise professional judgment, as always. The business payer would include its expenses the same way it would include other ordinary and necessary expenses. There are no additional recording elements on the business or personal side, however, this could change, so keep tabs on updates from the IRS.
There are no clear rules on how to implement this. Some states may not accept the deduction. You have to present best and worst-case scenarios to your clients. There is a chance you are too aggressive with your deductions, so be careful not to do this.
How to Value Price This Engagement
Consider setting a price for this service rather than basing it on how much you save the client. This will boost your overall value.
When you use TaxPlanIQ, you can show your client the total savings, after your fees, in the form of an ROI. This will clearly explain your value. If you are looking to implement value-based pricing, now is the time.
Note: Jackie provides a general value-pricing guide that can be found here.
Steps to Easily Implement
To implement, you need to communicate the opportunity with your clients. Jackie created an email communication that she used to send to her clients to price this engagement which is free in a two-week trial of TaxPlanIQ.
If you are value pricing already, it might be difficult to add this to your current pricing strategy, but if you don’t, this is the perfect opportunity to introduce this to your client. Simply tell them:
- This is the opportunity
- This is how much it will cost to get it.
If they are interested in moving forward with the strategy, collect the expense workbook, per recipient, and quote the client. Then, send the acceptance letter for an e-signature. Finally, you’ll record AJE in accounting to debt “other expenses” Section 139 Relief, and credit the original account used for payment.
Throughout this process, the client will need to fill out the Section 139 expense calculator form and return it and provide signed acknowledgment letters by recipients.
To learn more about Section 139 be sure to listen to Jackie’s full presentation on CPA Academy by registering here.
She dives deeper into the deduction and answers plenty of questions regarding the topic.