On October 2, 2017, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Relief Act; P.L. 115-63). Title V of the Relief Act provides additional tax relief to victims of hurricanes Harvey, Irma, and Maria, as well as to the west coast areas affected by 2017’s numerous wildfires. This relief applies only to losses incurred in the Hurricane Harvey, Irma, and Maria federally declared disaster zones where such disaster has been declared by the president before September 21, 2017.
Disaster-related Personal Casualty Losses
The Relief Act eliminates the 10% of adjusted gross income (AGI) floor in computing the deductible casualty loss for qualified disaster-related personal casualty losses; however it retains the $100 per loss limitation [section 504(b)(1)(A)(ii)].
Prior to the Relief Act’s enactment, taxpayers had to itemize their deductions in order to claim a casualty loss deduction. Now, however, taxpayers who sustained qualified disaster-related personal casualty losses do not need to itemize their deductions to take the qualified disaster-related personal casualty loss as an addition to the standard deduction [Relief Act section 504(b)(1)(C)].
Qualified disaster-related personal casualty losses are defined as losses described in Internal Revenue Code section 165(c)(3) that are attributable to—
- Hurricane Harvey and arose in the Hurricane Harvey disaster area on or after August 23, 2017 [Relief Act section 504(b)(3)(A)];
- Hurricane Irma and arose in the Hurricane Irma disaster area on or after September 4, 2017 [Relief Act section 504(b)(3)(B)]; or
- Hurricane Maria and arose in the Hurricane Maria disaster area on or after September 16, 2017 [Relief Act section 504(b)(3)(C)].
Earned Income Credit and Child Tax Credit
Qualified individuals may elect, for the purpose of computing the earned income credit, under IRC section 32, and the child tax credit, under IRC section 24(d), to use the earned income from the preceding tax year [Relief Act section 504 (c)(1)].
For purposes of this election, a qualified individual is defined as follows:
- A qualified Hurricane Harvey individual is any individual whose principal place of abode on August 23, 2017, was located in the Hurricane Harvey disaster zone, or in the Hurricane Harvey disaster area (but outside the Hurricane Harvey disaster zone) and such individual was displaced from such principal place of abode by reason of Hurricane Harvey.
- A qualified Hurricane Irma individual is any individual whose principal place of abode on September 4, 2017, was located in the Hurricane Irma disaster zone, or in the Hurricane Irma disaster area (but outside the Hurricane Irma disaster zone) and such individual was displaced from such principal place of abode by reason of Hurricane Irma.
- A qualified Hurricane Maria individual is any individual whose principal place of abode on September 16, 2017, was located in the Hurricane Maria disaster zone, or in the Hurricane Maria disaster area (but outside the Hurricane Maria disaster zone) and such individual was displaced from such principal place of abode by reason of Hurricane Maria.
Distributions from Qualified Retirement Plans
The Relief Act provides that the 10% additional tax on early distributions from qualified retirement plans under IRC section 52(t) shall not apply to any qualified hurricane distribution. The aggregate amount of distributions received by an individual that may be treated as qualified hurricane distributions for any taxable year cannot exceed the excess (if any) of $100,000 over the aggregate amounts treated as received by an individual for all prior taxable years [Relief Act section 502(a)(1) and (2)].
For the purposes of this provision, a qualified hurricane distribution is defined as follows:
- In the case of Hurricane Harvey, any distribution from an eligible retirement plan made on or after August 23, 2017, and before January 1, 2019, to an individual whose principal place of abode on August 23, 2017, was located in the Hurricane Harvey disaster area and who has sustained an economic loss because of Hurricane Harvey [Relief Act section 502(a)(4)(A)(i)]
- In the case of Hurricane Irma, any distribution from an eligible retirement plan made to an individual on or after September 4, 2017, and before January 1, 2019, to an whose principal place of abode on September 4, 2017, was located in the Hurricane Irma disaster area and has sustained an economic loss because of Hurricane Irma [Relief Act section 502(a)(4)(A)(ii)]
- In the case of Hurricane Maria, any distribution from an eligible retirement plan made on or after September 16, 2017, and before January 1, 2019, to an individual whose principal place of abode on September 16, 2017, was located in the Hurricane Maria disaster area and who has sustained an economic loss because of Hurricane Maria [Relief Act section 502(a)(4)(A)(iii)]
In addition, the Relief Act provides that any qualified distribution made to an individual “shall not be treated as violating any requirement of the Internal Revenue Code of 1986 merely because the plan treats such distribution as a qualified hurricane distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000” [Relief Act section 502(a)(2)(B)].
A qualified distribution also includes a distribution received from a 401(k) or a 403(b) plan (to the extent such distribution relates to financial hardship), the purpose of which was to purchase or construct a principal residence in the Hurricane Harvey, Hurricane Irma, or Hurricane Maria disaster areas, and which was received after February 28, 2017, and before September 21, 2017, provided that this personal residence was not purchased or constructed on account of Hurricanes Harvey, Irma, or Maria [Relief Act section 502(b)(2)].
Recipients of qualified hurricane distributions may make one or more contributions to an eligible retirement plan as defined in IRC section 402(c)(8)(B); these may not total more than the amount of the qualified hurricane distribution they received. These recontributions must have been made during the period beginning on August 23, 2017, and ending on February 28, 2018 [Relief Act section 502(b)(1)].
The Relief Act increased to $100,000 (previously $50,000) the maximum amount of loans from a qualified retirement account to a qualified individual that are not treated as distributions made on or after September 29, 2017, and before January 1, 2018 [Relief Act section 502(c)(1)]. For purposes of this provision, a qualified individual is defined as follows:
- A qualified Hurricane Harvey Individual is an individual whose principal place of abode on August 23, 2017, was located in the Hurricane Harvey disaster area and has sustained an economic loss due to Hurricane Harvey [Relief Act section 502(c)(3)(B)].
- A qualified Hurricane Irma Individual is an individual (other than a Hurricane Harvey Individual) whose principal place of abode on September 4, 2017, was located in the Hurricane Irma disaster area and has sustained an economic loss due to Hurricane Irma [Relief Act section 502(c)(3)(C)].
- A qualified Hurricane Maria Individual is an individual (other than a Hurricane Harvey Individual or a Hurricane Irma Individual) whose principal place of abode on September 16, 2017, was located in the Hurricane Maria disaster area and has sustained an economic loss due to Hurricane Maria [Relief Act section 502(c)(3)(D)].
Hurricane Disaster Employee Retention Credits
The Relief Act creates a Hurricane Harvey employee retention credit as a component of the IRC section 38 general business credit. This credit is an amount equal to 40% of the qualified wages paid by an eligible employer to each eligible employee; the maximum qualified wages paid may not exceed $6,000 for each eligible employee [Relief Act section 503(a)(1)].
An eligible employer is one that conducted an active trade or business on August 23, 2017, but which was inoperable on any day after August 23, 2017, and before January 1, 2018, as a result of Hurricane Harvey [Relief Act section 503(a)(2)(A)]. An eligible employee is one who works for an eligible employer where the employee’s principal place of employment on August 23, 2017, was in the Hurricane Harvey disaster zone [Relief Act section 503(a)(2)(B)].
Qualified wages are those paid or incurred by an eligible employer to an eligible employee on any day after August 23, 2017, and before January 1, 2018, provided those wages were paid during the period—
- beginning on the date when the active trade or business of an eligible employer became inoperable at the eligible employer’s principal place of business in the Hurricane Harvey disaster zone, and
- ending on the date that the eligible employer is able to resume significant operations at such principal place of employment [Relief Act section 503(a)(2)(C)].
The Relief Act also creates a Hurricane Irma employee retention credit, whose amount and maximum qualified wages are equal to those of the Hurricane Harvey employee retention credit [Relief Act section 503(b)(1)]. For purposes of the Hurricane Irma credit, an eligible employer is one which conducted an active trade or business on September 4, 2017, that was inoperable on any day after September 4, 2017, and before January 1, 2018, as a result of Hurricane Irma [Relief Act section 503(b)(2)(A)]. An eligible employee is one who works for an eligible employer where the employee’s principal place of employment on September 4, 2017, was in the Hurricane Irma disaster zone [Relief Act section 503(b)(2)(B)].
Qualified wages for the Hurricane Irma employee retention credit are those paid or incurred by an eligible employer to an eligible employee on any day after September 4, 2017, and before January 1, 2018, provided those wages were paid during the period—
- beginning on the date when the active trade or business of an eligible employer became inoperable at the eligible employer’s principal place of business in the Hurricane Irma disaster zone, and
- ending on the date that the eligible employer is able to resume significant operations at such principal place of employment [Relief Act section 503(b)(2)(C)].
Finally, the Relief Act creates a Hurricane Maria employee retention credit. The amount of the credit and the maximum qualified wages are the same as in the Hurricane Harvey and Irma credits [Relief Act section 503(c)(1)]. An eligible employer is one that conducted an active trade or business on September 16, 2017, and which was inoperable on any day after September 16, 2017, and before January 1, 2018, as a result of Hurricane Maria [Relief Act section 503(c)(1)(A)]. An eligible employee is one who works for an eligible employer where the employee’s principal place of employment on September 16, 2017, was in the Hurricane Maria disaster zone [Relief Act section 503(c)(1)(B)].
Qualified wages for the Hurricane Maria employee retention credit are those paid or incurred by an eligible employer to an eligible employee on any day after September 16, 2017, and before January 1, 2018, provided those wages were paid during the period—
- beginning on the date when the active trade or business of an eligible employer became inoperable at the eligible employer’s principal place of business in the Hurricane Maria disaster zone, and
- ending on the date that the eligible employer is able to resume significant operations at such principal place of employment [Relief Act section 503(c)(1)(B)].
Temporary Suspension of Limitations on Charitable Contributions
The Relief Act provides that the percentage limitation on qualified charitable contributions, for both individuals and corporations, will not apply to qualified contributions, as defined below [Relief Act section 504(a)(1)].
Qualified charitable contributions in excess of an individual taxpayer’s 50% of AGI limitation may be deducted up to the amount of such taxpayer’s AGI [Relief Act section 504(a)(2)(A)(i)]. Any amount of qualified charitable contributions greater than the taxpayer’s AGI shall be added to any carryover of charitable contributions that do not qualify as qualified charitable contributions and carried over in accordance with the carryback rules under IRC section 170 (d)(1)(A) [Relief Act section 504(a)(2)(A)(ii)].
The overall limitation on itemized deductions under IRC section 68(a) will not be applied to any qualified charitable contributions paid during taxable year [Relief Act section 504(a)(3)].
Qualified charitable contributions in excess of a C corporation’s 10% of taxable income (without taking into account any charitable contribution) limitation may be deducted up to an amount not to exceed the C corporation’s taxable income [Relief Act section 504(a)(2)(B)(i)]. Any amount of qualified charitable contributions greater than the C corporation’s taxable income shall be added to any carryover of charitable contributions that do not qualify as qualified charitable contributions and carried over for 54 years in accordance with the carryback rules under IRC section 170 (d)(2)(A) [Relief Act section 504(a)(2)(B)(ii)].
Any charitable contribution that meets the requirements of IRC section 170(c)will qualify. provided such contribution is paid in cash to an organization defined in IRC section 170(b)(1)(A) during the period beginning on August 23, 2017, and ending on December 31, 2017, for relief efforts in the Hurricane Harvey, Hurricane Irma, or Hurricane Maria disaster areas [Relief Act section 504(a)(4)].
Preexisting Disaster-Related Personal Casualty Loss Provisions
In addition to the qualified disaster-related personal casualty loss benefits provided in the Relief Act, the IRC contains provisions to help victims of disasters. These provisions include the following:
- A taxpayer who suffers a disaster loss resulting from a federally declared disaster may elect to deduct that loss in the tax year immediately preceding the year of the disaster loss. Taxpayers who have not yet filed their tax return for the immediately preceding tax year may make the election on that return when it is filed. Taxpayers who have already filed their return for the immediately preceding tax year may make the election by filing an amended return [IRC section 165(i)(1)].
- For the purpose of computing a noncorporate taxpayer’s net operating loss (NOL), a casualty loss is treated as a business loss, and as such can create an NOL [IRC section 172(d)(4)(C)].
Taking the First Steps toward Rebuilding
A full recovery from Hurricanes Harvey, Irma, and Maria will take years. For the moment, however, affected taxpayers do have some immediate relief available to them. CPAs with a full understanding of the above provisions will be able to provide much-needed help for those taxpayers during the current filing season.
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Mark H. Levin, CPA, is an adjunct assistant professor at York College, City University of New York, Jamaica, N.Y.
