Tax Relief Available for Victims of Hurricanes Harvey, Irma, and Maria
On September 29, 2017, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Relief Act) into law. The law provides temporary tax relief to victims of hurricanes Harvey, Irma, and Maria. Some of the highlights:
- Offers a tax credit to help businesses that were rendered inoperable due to the storm
- Provides tax relief for those working toward the recovery effort
- Makes it easier for people to write off eligible hurricane losses on their tax return
- Allows loans and hardship distributions from qualifying benefit plans
- Gives hurricane victims access to retirement funds without penalty
- Temporarily suspends deduction limits for charitable contributions made before year-end
- Provides taxpayers with more time to file their tax returns
Tax credit available to help businesses with employee retention
The Relief Act provides a new employee retention credit for qualifying employers who were rendered inoperable due to the storms but continued to pay eligible employees. The credit is treated as a general business credit and is equal to 40 percent of up to $6,000 of qualified wages with respect to each eligible employee for the tax year.
Eligible employers must have conducted business in a hurricane disaster zone on the specified disaster date (see table below) and if the business was rendered inoperable between that date and January 1, 2018.
Eligible employees are workers whose principal place of employment was in the Hurricane Harvey, Irma, or Maria disaster zone as of the respective dates.
Qualified wages are wages paid on any day after the specified date and before January 1, 2018, beginning with the date the business became inoperable and ending on the date the business resumed significant operations. Qualified wages include wages paid for no services, services performed at a place other than the employee’s principal place of employment, or services performed at the employee’s principal place of employment before the business resumes significant operations.
|Applicable Disaster Date||State/Territory||Affected Counties*|
|August 23, 2017||Texas||Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Calhoun, Chambers, Colorado, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharton|
|September 4, 2017||Florida||Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lafayette, Lake, Lee, Levy, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Union, Volusia|
|September 5, 2017||Virgin Islands||St. Croix, St. John, and St. Thomas|
|September 6, 2017||Georgia||Camden, Charlton, Chatham, Coffee, Glynn, Liberty, McIntosh|
|September 16, 2017||Virgin Islands||St. Croix, St. John, and St. Thomas|
|September 17, 2017||Puerto Rico||All 78 municipalities|
While the IRS has not released official guidance on how the credit will be reported, it is anticipated that procedures will follow prior disaster relief. In 2008, a similar credit was available to employers in the Midwestern disaster area. The IRS issued a specific form (Form 5884-A, Credit for Midwestern Disaster Area Employers) for calculating the credit. The credit was reported on the appropriate line of Form 3800, General Business Credit and both forms were attached to the employer’s income tax return.
Tax relief for employees who provide aid
Employees who help with disaster recovery efforts may also be eligible for tax relief. Typically, unused sick leave received in cash or relinquished by directing the employer to make payments on behalf of the employee are includible in employee gross income. Gross income includes income from whatever source derived, including compensation for services.
But under the new law, employees may forgo vacation, sick, or personal leave in exchange for cash payments by the employer to hurricane relief organizations. The IRS will not assert that the forgone benefits are gross income or wages to the employee. The employer is directed to exclude the forgone benefits from boxes 1, 3 and 5 of Form W-2.
The payments by the employer on behalf of the employee must be made to eligible charities before January 1, 2019. Electing employees may not claim a charitable deduction and the employer deducts the payments as business expenses rather than charitable contributions.
Relaxed disaster-related deductions for personal loss
Generally, a taxpayer can claim a deduction for any casualty loss sustained during the tax year that is not compensated by insurance or otherwise. For individuals, a personal loss from a casualty can be itemized as a deduction, but only if it exceeds $100, and if all casualty losses (after application of a $100 floor) exceed 10 percent of AGI for the tax year. A taxpayer may elect to take the loss deduction in the preceding tax year if the loss occurred in a disaster area and was attributable to a federally declared disaster.
The Relief Act removes the 10 percent AGI limitation for taxpayers claiming a net disaster loss, defined as the excess of qualified disaster-related personal casualty losses over personal casualty gains.
The law also eliminates the itemized deduction requirement by increasing the standard deduction by the net disaster loss. The increased standard deduction is not disallowed for alternative minimum tax purposes. Finally, the $100-per-casualty floor has been increased to $500.
Here’s how it works
Qualified disaster-related personal casualty losses are losses that arise in and are attributable to:
- The Hurricane Harvey disaster area on or after August 23, 2017
- The Hurricane Irma disaster area on or after September 4, 2017
- The Hurricane Maria disaster area on or after September 16, 2017
Hardship distributions from retirement plans are exempt from 10 percent penalty
Under typical circumstances, taxpayers who make an early withdrawal from a qualified retirement plan are subject to regular income tax and an additional tax equal to 10 percent of the amount withdrawn. Generally, a loan from a qualified retirement plan is considered taxable unless:
- The loan does not exceed the lesser of $50,000, or one-half of the present value of the accrued benefit, and
- The loan is required to be repaid within five years.
The Relief Act removes the 10 percent penalty. Taxpayers are also allowed to spread the income from these distributions over a three-year period, beginning with the year that any amount is required to be included in gross income. In addition, taxpayers are also allowed to recontribute amounts distributed over a three-year period beginning on the day after the distribution was received and treat the amounts as a nontaxable rollover. Finally, distributions are not subject to the normal 20 percent income tax withholding.
Here’s how it works
Qualifying hurricane distributions must be made:
- On or after August 23, 2017, and before January 1, 2019, with a principal place of residence in the Hurricane Harvey disaster area
- On or after September 4, 2017, and before January 1, 2019, with a principal place of residence in the Hurricane Irma disaster area
- On or after September 16, 2017, and before January 1, 2019, with a principal place of residence in the Hurricane Maria disaster area
Changes to loan rules
The Relief Act increases the maximum amount that can be borrowed from a plan to $100,000 and removes the one-half of present value limitation. The Relief Act also delays the repayment term by one year if the due date of any repayment occurs during the qualified beginning date (specified above) and ends on December 31, 2018.
Charitable deduction rules eased through end of 2017
The new law also makes it easier for individuals to donate to hurricane recovery efforts. Under current law, individuals who itemize can deduct charitable contributions, (depending on the type of property contributed and the type of nonprofit), up to 50 percent, 30 percent, or 20 percent of AGI. A corporation generally can deduct charitable contributions up to 10 percent of its taxable income and excess contributions can be carried forward for five years.
The new rule temporarily suspends the AGI and taxable income limitations for qualifying contribution deductions. It also changes the treatment of excess contributions and provides an exemption for the overall limitation on itemized deductions.
Here’s how it works
- Qualifying contributions must be made between August 23, 2017, and December 31, 2017.
- Donations must go to a qualifying entity for relief effort in hurricanes Harvey, Irma, or Maria disaster areas.
- Taxpayers must obtain written acknowledgement that such contribution was used for hurricane relief efforts.
- Taxpayers must elect to have these provisions apply (note that for pass-through entities, the election is made by each individual partner or shareholder).
How we can help
While the law has been passed, not all of the IRS filing guidance has been released. Contact your tax advisor to determine if this new law affects your personal tax situation, and follow the Hurricane Tax Relief Center for further updates.