Victims of Hurricanes Harvey, Irma, and Maria now have access to additional and much-needed assistance by way of tax relief. The Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Disaster Relief Act) was signed into law September 29. Tax benefits for affected individuals and businesses range from additional tax credits to penalty relief on retirement plan withdrawals. Additionally, special tax incentives are provided for any taxpayer that makes a qualifying charitable contribution.
The IRS previously provided some relief to hurricane victims, including extensions of filing deadlines, extensions of tax deposit due dates, and relaxed rules for loans and hardship withdrawals from retirement accounts. Employee donations of paid-time-off balances to qualified charities will also be treated as nontaxable wages, effectively giving the donor a full tax benefit without having to worry about itemized deduction limitations. The Disaster Relief Act provides additional relief beyond the limits that the IRS can provide on its own.
New Tax Benefits for Hurricane Victims
The additional tax benefits created under the Disaster Relief Act for hurricane victims are targeted to individuals and businesses located in one of two areas, specified as “disaster zones” and “disaster areas.” A disaster area is one that has been declared by the President as a disaster area as a result of one of the three hurricanes. A disaster zone is the portion of the disaster area determined to warrant individual or individual and public assistance from the Federal Government (i.e., FEMA assistance). These locations are identified on FEMA’s website at www.FEMA.gov/disasters, where disaster areas are shaded yellow and disaster zones are shaded red.
The new tax benefits under the Disaster Relief Act for hurricane victims located in one of these areas include the following:
Eased Deduction Rule for Individual Casualty Losses
Disaster-related casualty losses sustained by individuals located in a disaster area can be claimed as a deduction without regard to whether such losses exceed 10 percent of adjusted gross income, as long as the loss exceeds $500. A taxpayer does not need to itemize deductions to deduct a qualified casualty loss, as qualified amounts are added to the standard deduction. This portion of the increased standard deduction also qualifies as a deduction for alternative minimum tax purposes.
Penalty Relief and Income Deferral on Retirement Plan Withdrawals
Distributions for a hurricane-related economic loss from an eligible retirement plan to individuals whose principal place of abode is located in a disaster area qualify for special tax benefits. Distributions from an eligible retirement plan (such as a 401(k) plan or an IRA) must have been taken during a specified period and cannot exceed $100,000. The specified period for distributions is the period beginning on or after Aug. 23, 2017, and before Jan. 1, 2019, for Hurricane Harvey, the period beginning on or after Sept. 4, 2017, and before Jan. 1, 2019, for Hurricane Irma, and the period beginning on or after Sept. 16, 2017, and before Jan. 1, 2019, for Hurricane Maria.
Qualifying distributions are not subject to the 10 percent early withdrawal penalty. Qualifying distributions also are not subject to income tax withholding. Furthermore, income resulting from qualifying distributions can be spread over a three-year period, beginning with the first year that income is to be included. Taxpayers can elect out of the three-year deferral period.
Enhanced Access to Retirement Plan Loans
The maximum loan for a hurricane-related economic loss from an eligible retirement plan to individuals whose principal place of abode is located in a disaster area is increased from $50,000 to $100,000. The loan must have been taken during a similar period to the ones specified for retirement plan withdrawals, except where the ending date in each case is Dec. 31, 2018. Qualifying loan amounts are not subject to a “one half of present value limitation,” and the due date for the first repayment is delayed by one year (with the five-year repayment period extended to include this additional year).
Eased Eligibility for Child Tax Credit and Earned Income Credit
Individuals whose principal place of abode was located in a disaster zone qualify for eased eligibility to determine the refundable portion of the child tax credit and the earned income credit. Individuals located in a disaster area also qualify, if such individuals were also displaced from such principal place of abode by reason of the hurricane. Qualifying individuals can elect to calculate these 2017 credits with reference to their earned income for 2016, in lieu of their earned income for 2017.
New Business Tax Credit for Employee Retention
Employers that conducted an active trade or business in a disaster zone as of a specified date are eligible for an employee retention credit, if the trade or business was rendered inoperable as a result of damage sustained by the hurricane at any time between the specified date and Jan. 1, 2018. Based on this language, it should be possible to claim this credit even when the employer’s facilities were not damaged, but were simply rendered inoperable as a result of hurricane damage (such as systemic power loss).
The specified date for Hurricane Harvey is Aug. 23, 2017; the specified date for Hurricane Irma is Sept. 4, 2017; the specified date for Hurricane Maria is Sept. 16, 2017. The employee retention credit is equal to 40 percent of qualified wages paid to an eligible employee during this period, up to $6,000 of wages per employee.
Eligible employees are those having a principal place of employment with the employer in a disaster zone during this period. Qualified wages are those daily amounts paid to eligible employees beginning on the date that the trade or business first become inoperable and ending on the date when significant operations resumed at the principal place of employment. It does not matter whether an employee was able to perform some or any services at a different place of employment during the period of interruption. Certain limitations apply to businesses claiming other employment credits for the same employees, businesses under common control, and businesses employing shareholders or family members.
New Tax Benefits for All Taxpayers
The Disaster Tax Relief Act also creates a special tax incentive for all taxpayers, not just those located in disaster areas or disaster zones. Specifically, individuals and businesses can make charitable contributions during a specified period to a qualified charity without being subject to income limitations, and individuals are not required to treat such qualified charitable contributions as an itemized deduction. The usual income limitations for individuals are fifty percent of adjusted gross income, and for businesses, 10 percent of taxable income. The specified period to make qualified charitable contributions is the period beginning Aug. 23, 2017, and ending Dec. 31, 2017.
Qualified charitable contributions must be made to a charitable organization that will use the contribution for hurricane relief efforts, and the written acknowledgement from the charity must specify this usage. To take advantage of this provision, taxpayers must affirmatively elect to apply the special tax treatment. Owners of partnerships and S corporations must separately make the election for qualifying charitable contributions made by the respective businesses.
Takeaway
The Disaster Tax Relief Act creates many tax incentives for individuals and businesses located in a disaster area or a disaster zone. Individuals and businesses impacted by Hurricanes Harvey, Irma, and Maria should scrutinize these tax incentives to determine eligibility. Furthermore, any taxpayer can take advantage of the special rules for charitable contributions made to charities for the benefit of hurricane relief efforts.
For more information concerning disaster tax relief provisions, please contact your local CBIZ MHM tax professional.
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