One of the administrative functions of the IRS is to provide limited tax relief to taxpayers who have been affected by natural disasters. This occasionally is supplemented by additional permanent relief that can be provided by Congress. In the wake of Hurricanes Harvey and Irma, the IRS announced that tax relief is available for taxpayers affected by those storms.
Who Qualifies for Hurricane-Related Tax Relief
When the IRS establishes tax relief, it first designates the affected taxpayers who qualify. The IRS defines an affected taxpayer as an individual who lives in a covered disaster area or an enterprise that has a principal place of business located in a covered disaster area. “Affected taxpayers” also include “[a]ny individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a deadline … are located in the covered disaster area.” Taxpayers can verify their inclusion in a covered disaster area by clicking on their state on this IRS webpage, or the IRS specific pages for Hurricanes Harvey and Irma. All 67 counties in Florida are now included. These resources include information on the covered areas and the types of relief available.
One of the primary forms of relief the IRS provides to disaster victims is for compliance with tax return filing deadlines. In the case of Hurricanes Harvey and Irma, the IRS has extended the due date for returns with a valid extension of time to file from Sept. 15, 2017 (most business returns), Oct. 15, 2017 (individual returns) and Nov. 15, 2017 (tax-exempt organizations with 2016 extensions) to Jan. 31, 2018. Also extended are the due dates for quarterly estimated payments due Sept. 15, 2017, and Jan. 16, 2018, and the quarterly payroll and excise tax returns due Oct. 31, 2017.
The IRS website specifies that the Service “automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.”
Additionally, for taxpayers affected by Hurricane Harvey, payroll and excise tax deposits due on or after Aug. 23, 2017, and before Sept. 7, 2017, were extended to Sept. 7, 2017. Likewise for taxpayers affected by Hurricane Irma, payroll and excise tax deposits due on or after Sept. 4, 2017, and before Sept. 19, 2017 were extended to Sept. 19, 2017.
Other Forms of Relief
The IRS can also provide other forms of relief. In the case of both of these hurricanes, the IRS has announced that retirement plans such as 401k and other employer sponsored plans are allowed to make loans and hardship distributions under relaxed rules for victims in affected areas, even if these plans do not yet have provisions in place for making loans. Hardship withdrawals must be taken by Jan. 31, 2018. These provisions allow victims to receive their withdrawals faster and with less “red tape,” where substantiation rules have been relaxed and withdrawals can be taken for any type of need (such as food and shelter). For those who take a hardship distribution, the six-month ban on further contributions to 401(k) and 403(b) plans is also waived under the disaster relief rules. Furthermore, taxpayers who live outside of the disaster area can take a loan or hardship distribution if it is to assist a son, daughter, parent, grandparent, or other dependent who lives or works in one of these areas. Note that plan loans must still be repaid or they will be treated as taxable distributions, and that hardship distributions are still taxable and are subject to the 10 percent early withdrawal penalty.
Contributions to Relief Efforts
Additionally, there are ways that individuals and business can contribute to relief efforts. Individuals can donate their unused vacation, sick, or personal leave to a leave-based donation organization without first recognizing the wage income. Donated leave time will not be included in the employee’s wages and may be deducted by the employer as wages. The donation must occur before Jan. 1, 2018, and must be made to a qualifying charitable organization that provides relief for victims of Hurricanes Harvey and Irma. Businesses may also make qualified disaster relief payments to their employees. Qualified payments are tax-free and can be made to cover reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Also covered are payments to employees for the repair or rehabilitation of a rented or owned personal residence, including personal contents.
Finally, it is important to remember that in the event of a disaster, casualty losses not reimbursed by insurance are deductible. The casualty loss deduction may be claimed on the taxpayer’s 2017 tax return or on an original or amended 2016 tax return. For more information on the types of tax relief available to those affected by a natural disaster, please contact your CBIZ MHM tax professional.
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