Press Room: Tax Release
Tax Relief Measures in the Wake of Hurricanes Harvey, Irma and Maria
As individuals and businesses struggle to recover from the destruction of Hurricanes Harvey, Irma and Maria, it is important to understand all available relief being offered at both the federal and state levels for taxpayers affected by these disasters. An extension for filing tax returns or making tax payments is just one form of tax-related assistance. From a property standpoint, taxpayers may be able to take a casualty loss deduction for damaged property depending on the nature of the property, potential recovery from insurance, and whether the damage was complete or partial. A wide range of options is also available for employers who want to help their workers after a disaster. Business taxpayers with damaged property may also benefit from special rules applicable to involuntary conversions and like-kind exchanges. Companies may be familiar with the standard rules related to charitable contributions, but may not be aware of special rules related to donations of inventory.
Return Filing Dates
IRS has granted taxpayers in areas affected by Hurricanes Harvey, Irma and Maria with an extension to file certain tax returns, make certain tax payments or perform other acts specified in a revenue procedure, notice or other IRS guidance. The extended deadline is generally January 31, 2018. This automatic postponement applies to affected taxpayers filing most federal tax returns with an original or extended due date occurring on or after August 23, 2017 (Harvey), September 4, 2017 (Irma) or September 16, 2017 (Maria), and before January 31, 2018. The postponement is available to taxpayers located in areas designated by IRS or who may have books and records in the federally declared disaster areas.
Federal tax relief is also provided for the September 15, 2017 and January 16, 2018 deadlines for making quarterly estimated tax payments. For individual taxpayers, the extended due date also applies to 2016 returns that received a filing extension until October 2 (for trusts) or October 15, 2017, although the relief does not apply with respect to payments that were due by April 18, 2017.
Many states have also issued tax return filing or payment relief for taxpayers affected by Hurricanes Harvey, Irma and Maria. Requirements and extended deadlines vary by state with some states following the extended deadlines outlined by the federal government and others requiring a specific request to the state tax authority either orally or in writing.
Casualty Loss Deductions
If storm-related damage is sustained to a home, personal property, rental property or business, affected taxpayers may be able to claim a deduction on their federal tax return. The federal tax code allows businesses to take a casualty loss deduction for an uninsured and unreimbursed disaster-related loss sustained during the tax year. In the context of a federally declared disaster, taxpayers in the disaster area may choose to take a deduction on their federal tax return for the year the loss occurred or on the return for the prior year. If a 2016 federal tax return has already been filed, the taxpayer should consider whether to file an amended return to accelerate substantial casualty loss deductions. For business or income-producing property that was completely destroyed, the loss is limited to the adjusted basis of the property at the time of the casualty event. For business and income-producing property that sustained partial damage or personal-use property that is either completely destroyed or partially damaged, the calculated loss is the lesser of the adjusted basis of the property or the decline in the fair market value of the property as measured before and after the casualty event. The costs of restoring damaged business property are not deductible but generally must be capitalized to the extent of the adjusted tax basis of the property destroyed in the casualty. Personal casualty losses of individuals are subject to special requirements and special rules also apply for deducting casualty losses of inventory. Most casualty losses require a competent appraisal to determine the before and after fair market values of the property.
Insurance proceeds received as a result of casualty losses are generally characterized as payments for either lost profits or damaged property. Payments for lost profits are generally currently taxable, while payments for the loss of use of property or property damage are generally treated as a recovery of capital and taxable to the extent the amount received exceeds the taxpayer’s basis in the property. Taxpayers should also be aware that business interruption insurance proceeds may be treated as domestic product gross receipts and affect a taxpayer’s calculation for purposes of the domestic production activities deduction.
On an individual tax return, casualty losses claimed for personal-use property and income-producing property are treated as itemized deductions. The loss amount for personal-use property must first be reduced by $100 and then by 10% of adjusted gross income (AGI) to determine the amount allowed as an itemized deduction. The 10%-of-AGI limitation prevents many taxpayers from claiming a casualty loss for personal-use property. By comparison, income-producing property is not subject to this limitation. Care must be taken to properly categorize between personal-use and investment property to maximize the deductibility of casualty losses. Losses claimed for business property are deductible in full as a reduction for AGI, an even more favorable tax treatment. For those taxpayers who are concerned about the alternative minimum tax (AMT), the casualty loss is allowed under both the regular and AMT taxing regimes for all types of property.
Employee Assistance Programs
Employers may provide financial assistance to employees for expenses incurred as a result of a qualified disaster and receive a deduction for payment if the assistance is related to eligible expenses. Reasonable and necessary personal, family, living or funeral expenses; expenses incurred in the repair or rehabilitation of a personal residence; and expenses incurred to replace damaged contents of a personal residence are considered eligible expenses. Employers may also make loans to employees, interest-free up to a certain threshold. Leave-based donation programs are another option for employers, and allow employees to donate vacation, sick or personal leave for the benefit of hurricane victims. Employers receive a deduction for the donated leave, while the donor employees do not recognize taxable income or wages. IRS has established criteria related to the donation of leave and these requirements should be followed carefully in administering a leave-based donation program.
Other ways that employers can provide for employee assistance include employee to employee assistance funds (EAFs)—an informal way for employees to make contributions to other employees (generally not tax deductible), employee assistance grants through a public charity or private foundation established by the employer, and employer-sponsored donor advised funds—which allow employees to make tax-deductible contributions to support other employees.
Involuntary Conversions and Like-Kind Exchanges
Business property that is involuntarily converted into money as a result of destruction, in whole or in part, is generally subject to the involuntary conversion rules in the tax code but special rules apply in the context of a federally declared disaster. Generally, taxpayers receiving insurance proceeds from business property destroyed in a hurricane or other disaster may invest those proceeds in other tangible property to be held for productive use in a trade or business. The insurance proceeds must generally be reinvested in property that is similar or related in service or use and the purchase must be made within two years after the close of the first tax year in which any part of the gain is realized. However, where the property held for productive use in a trade or business or for investment is damaged and involuntarily converted as a result of a federally declared disaster, any tangible property held for productive use in a trade or business is treated as property similar or related in service or use to the converted property. This special rule for damage caused by a federally declared disaster may allow a taxpayer to replace one type of property (e.g., inventory) with other types of property (e.g., real property) as a result of an involuntary conversion.
A special provision also applies to like-kind exchanges occurring in the context of a federally declared disaster. While the tax code generally requires a taxpayer to reinvest proceeds in replacement property that is identified within 45 days and received within 180 days, the tax code defines time-sensitive acts in which IRS may postpone the time limit. IRS has expanded the list through a revenue procedure to include like-kind exchanges. A taxpayer may qualify for a postponement under the like-kind exchange rules if the taxpayer is designated by IRS as an affected taxpayer and the relinquished property was transferred on or after the date of the federally declared disaster.
While donations of cash or other property are entitled to the standard deduction for charitable contributions, a special enhanced deduction exists for the donation of inventory under Sec. 170(e)(3). The enhanced deduction is limited to inventory contributions by C corporations but other business taxpayers may take the deduction if the contribution is food inventory. The donation must be made to assist the ill, needy or infants in a manner that is related to the charity’s purpose and tax exempt status, and the deduction is limited to the lesser of 1) the basis of the contributed inventory plus one-half of the ordinary income that would have been recognized if the property were sold at its fair market value, or 2) twice the basis of the property.
For individuals and businesses in recovery mode after the recent hurricanes, it is important to know that there are options available to assist in the rebuilding process. While many of the tax relief measures are complex and involve important distinctions and requirements, a competent tax advisor can navigate this process. Andersen Tax is poised to assist individuals and employers affected by the recent hurricanes in seeking disaster-related tax relief. Our tax compliance professionals are ready to help you seek extensions and other tax return relief measures, claim deductions related to property loss, and assist your employees in the affected areas.