Calvetti Ferguson

Houston, TX – New Tax Law Developments: Expanding the Hurricane Harvey, Irma, and Maria Relief Efforts

We hope that you, your families and your business fared well through the various storms. However, if you were not as lucky, we hope that you are aware and taking advantage of the various programs available to help you get back on your feet.

Soon after the storms hit, the Internal Revenue Services (“IRS”) issued general relief providing taxpayers with assistance, including additional time to file 2016 tax returns, additional time to pay 2017 estimated taxes, etc.

On September 29, 2017 and in addition to the already existing IRS tax relief, President Trump signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (HR 3823) in an effort to “provide targeted tax relief for taxpayers impacted by Hurricanes Harvey, Irma and Maria.”

These new tax rules make it easier for people affected by the hurricanes to write off hurricane losses on their tax returns, eliminating a requirement that personal losses must exceed 10% of adjusted gross income to qualify for a deduction. The new law also enhances the ability of hurricane victims to get penalty-free access to their retirement funds and temporarily suspends the limitations on the deduction for charitable contributions made before year-end for hurricane relief.

Below is a lengthier discussion on these provisions:

Opportunity Current Tax Law New Tax Law
Eased Casualty Loss Rules The deduction is an itemized deduction subject to the 10% AGI limit.   Generally, a taxpayer may claim a deduction for any loss sustained during the tax year and not compensated by insurance or otherwise. For individuals, a personal loss from a casualty is deductible only to the extent that (1) it exceeds $100, and (2) all casualty losses (after application of the $100-floor) for the tax year exceed 10% of adjusted gross income (AGI). If the disaster occurs in a federally declared disaster area, the taxpayer may elect to take into account the casualty loss in the tax year immediately preceding the tax year in which the disaster occurs. The deduction is not a per-se itemized deduction. Under the new tax law, taxpayers that suffer a “net disaster loss” may deduct such losses without subjecting it to the 10% AGI floor in order to qualify for the deduction.

A “net disaster loss” is defined as the excess of “qualified disaster-related personal casualty losses” over personal casualty gains. The qualified disaster losses are those that arose in a Hurricane Harvey, Irma or Maria disaster area on or after August 23, 2017, September 4, 2017 and September 16, 2017 and which are attributable to Hurricane Harvey, Irma or Maria, respectively.

The new law also eliminates the requirement that taxpayers must itemize deductions to access this tax relief for losses – it does so by increasing an individual taxpayer’s standard deduction by the net disaster loss.

The new law also provides that Alternative Minimum Tax does not apply for the portion of the standard deduction attributable to the net disaster loss.

Additionally, the new law increases the $100 per-casualty loss floor to $500 for qualified disaster-relief personal casualty losses.

Less Costly Access to Retirement Assets 10% tax penalty applies. A loan from a qualified employer plan to a participant or beneficiary is treated as a plan distribution unless, among other things: (i) the loan doesn’t exceed the lesser of (A) $50,000 or (B) half of the present value of the employee’s non-forfeitable accrued benefit under the plan (however, a loan up to $10,000 is allowed, even if it’s more than half the employee’s accrued benefit); and (ii) the loan is required to be repaid within 5 years except that a longer repayment can be used for a principal residence plan loan.

Early (generally, pre-age 59 ½) withdrawals from a qualified retirement plan result in regular tax plus an additional tax equal to 10% of the amounts withdrawn that are includible in gross income. The additional tax applies unless the taxpayer qualifies for one of several specific exceptions.

10% penalty relief. Under the new provisions, victims would not be subject to the 10% penalty on “qualified hurricane distributions” from their retirement plans of up to $100,000 (less any prior withdrawals treated as “qualified hurricane distributions.”

A “qualified hurricane distribution” is any distribution from an eligible retirement plan made on or after August 23, 2017, September 4, 2017, or September 16, 2017 and before January 1, 2019, to an individual whose principal place of abode on August 23, 2017, September 4, 2017 or September 16, 2017 is located in the Hurricane Harvey, Irma, or Maria disaster area, respectively, and who has sustained an economic loss by reason of the respective hurricane.

The new rules allow taxpayers to spread out any income inclusion resulting from such withdrawals over a 3-year period, beginning with the year that any amount is required to be included.

Charitable Deduction Limitations Suspended 50%, 30%, or 20% of AGI limits apply. An individual who itemizes can deduct charitable contributions up to 50%, 30%, or 20% AGI, depending on the type of property contributed and the type of donee. A corporation generally can deduct charitable contributions up to 10% of its taxable income. Amounts that exceed these ceilings (“excess contributions”) can be carried forward for five years by both individuals and corporations and are subject to various limitations and ordering rules. For individuals, charitable contributions are deductible only as itemized deductions. Temporarily suspends the majority of the limits. For qualifying charitable contributions associated with qualified hurricane relief, the new rules (1) temporarily suspends the majority of the limitations on charitable contributions, including the % limitations and the excess contributions, and (2) provides an exception to the overall limitation on itemized deductions for certain qualified contributions.

“Qualified contributions” must be paid during the period beginning on August 23, 2017 and ending December 31, 2017 in cash to a tax-exempt organization (IRC Section 170(b)(1)(A)) for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas.   Qualified contributions must be substantiated with a contemporaneous written acknowledgement that the contribution was or is to be used for relief efforts, and the taxpayer must make an election for the new rules to apply.

Employee Retention Tax Credit Certain business incentive credits are combined into one general business credit (GBC) for purposes of determining each credit’s allowance limitation for the tax year. A GBC (claimed on Form 3800) is allowed against income tax for a particular tax year and equals the sum of: (1) the business credit carryforwards carried to the tax year, (2) the current year GBC, and (3) the business credit carrybacks carried to the tax year. (Code Sec. 38(a)) A list of the component credits of the current year business credit is provided in Code Sec. 38(b). The new rules provide a new “employee retention credit” for “eligible employers” affected by Hurricanes Harvey, Irma, and Maria.

Eligible employers are generally defined as employers that conducted an active trade or business in a disaster zone as of a specified date (for Hurricane Harvey, August 23, 2017; Irma, September 4, 2017; and Maria, September 16, 2017), and the active trade or business of which was, on any day between the specified date and January 1, 2018, rendered inoperable as a result of damage sustained by the hurricane.

In general, the credit is be treated as a credit listed in Code Sec. 38(b), and equals 40% of up to $6,000 of “qualified wages” with respect to each “eligible employee” of such employer for the tax year.

An eligible employee with respect to an eligible employer is one whose principal place of employment with the employer was in Hurricane Harvey, Irma, or Maria disaster zone as of the respective date above.

Qualified wages mean wages (as defined in Code Sec. 51(c)(1) but without regard to Code Sec. 3306(b)(2)(B)) paid or incurred by an eligible employer with respect to an eligible employee on any day after the specified date (above) and before January 1, 2018, which occurs during the period: (i) beginning on the date on which the employer’s trade or business first became inoperable at the principal place of employment of the employee immediately before the respective hurricane, and (ii) ending on the date on which such trade or business has resumed significant operations at such principal place of employment. Qualified wages include wages paid without regard to whether the employee performs no services, performs services at a different place of employment than such principal place of employment, or performs services at such principal place of employment before significant operations have resumed.

An employee cannot be taken into account more than one time for purposes of the employee retention tax credit. So, for instance, if an employee is an eligible employee of an employer with respect to Hurricane Harvey for purposes of the credit, the employee cannot also be an eligible employee of the employer with respect to Hurricane Irma or Hurricane Maria.

The map below illustrates the distinction between “areas” and “zones” for the Hurricane Harvey disaster. A disaster “zone” means the portion of the disaster area determined by the President to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Relief and Emergency Assistance Act by reason of the disaster. A disaster “area” means an area with respect to which a major disaster has been declared by the President by reason of the disaster.

If you would like to inquire more about these new provisions, please do not hesitate to contact a Calvetti Ferguson tax team member.

New Tax Map