Tax Relief in Disaster Situations

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Tax Relief in Disaster Situations
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Objectives

• To Discuss
• Federal Tax Relief Available to Taxpayers in a
  Disaster Area
  
• Information About Presidentially Declared
  Disaster Areas
  
• Calculating Reporting Disaster Area Losses
• Disaster Relief Updates

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Possible Tax relief for Disaster Situations

• Special tax law provisions may help taxpayers
  recover financially from the impact of a
  disaster. The IRS may
  
• Grant extension periods for return filings and
  making tax payments
  
• Abate interest and late filing or late payment
  penalties
  
• Establish waiver period for employment and
  excise taxes

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Tax Relief for Disaster Situations

• Things to consider for a faster refund for
  individuals and businesses in a Presidentially
  Declared Disaster Area
  
• Claim losses related to the disaster on the
  previous year tax return, usually by filing
  an amended return, or
  
• Electronically filing original tax return for
  the year the loss occurred
  
• Treas. Regs. 1.165-11

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Filing Requirements for Losses

• Election to take casualty loss in preceding tax
  year must be made by the later of the
  following dates
  
• Due date (without extensions) for filing tax
  return for the tax year in which the disaster
  occurred.
  
• Due date (with extensions) for filing tax return
  for the preceding tax year.
  
• Example
• A calendar year taxpayer ordinarily has until
  April 15, 2006, to amend 2004 tax return to claim
  a casualty loss that occurred during 2005.
  
  IRC 165(i)(1)

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Filing Requirementsfor Losses (contd)

• How to deduct a loss in the preceding year
• Include statement either on the original
  return or the amended return with the
  following information
  
• - Date or dates of disaster
• - City, Town, County and State of disaster
• Statement can be either on the return or included
  with the return.
  IRC 165(i)(1)

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Filing Requirementsfor Losses ( contd)

• Once election made, it can be revoked within 90
  days of making the election.
  
• Must return any refund or credit received from
  making the choice.
  
• If revoked prior to getting refund, must return
  refund within 30 days of receiving it for
  revocation to be effective.
  
• 
  Treas. Regs. 1.165-11(e)

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Presidentially Declared Disaster Areas

• A list of the Presidentially Declared Disaster
  Areas, by State and County, are provided at the
  FEMA (Federal Emergency Management Agency)
  Website at
• www.fema.gov
• IRS information about Presidentially Declared
  Disaster Areas can be found at
  
• http//www.irs.gov/newsroom/index.html

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Casualty Determination

• A casualty is the damage, destruction, or loss
  of property resulting from an identifiable event
  that is sudden, unexpected, or unusual.
  

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Casualty Determination (contd)

• A sudden event is one that is swift, not gradual
  or progressive.
  
• An unexpected event is one that is ordinarily
  unanticipated and unintended.
  
• An unusual event is one that is not a day-to-day
  occurrence and that is not typical of the
  activity in which you were engaged.

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Disaster Area Loss

• A "disaster area loss is a casualty loss that
• occurred in an area determined by the
• President of the United States to warrant
• Federal disaster assistance. These places
• are known as Presidentially Declared Disaster
  Areas.
  
• Treas.
  Regs. 1.165-11(b)(2)
  
• IRC 139(c)

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Casualty Loss Proof

• Information needed to support the loss
• The type of casualty (car accident, fire, storm,
  etc.) and when it occurred.
  
• The loss was a direct result of the casualty
• You were the owner of the property, or if a
  lessee, you were contractually liable for the
  damage.

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Casualty Loss Proof (contd)

• Whether a claim for reimbursement exists for
  which there is a reasonable expectation of
  recovery.
  
• Documented evidence to support the claimed
  allowable loss.
  

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To Prove a Loss

• Records may have to be reconstructed.
• The information gathered will be used for tax
  purposes, as well as insurance reimbursement.

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Prior Year Tax Returns

• If necessary, file Form 4506 or 4506-T to secure
  copies of the previous four years of income tax
  returns/transcripts.
  
• The fee is waived if your loss is in a
  Presidentially Declared Disaster Area.
  
• Write in the applicable disaster title
  information in red at the top of F4506 to
  expedite processing and waive the fees.

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Real Estate

• Take photographs as quickly as possible to
  establish the extent of damage.
  
• Contact the title company, or bank that handled
  the purchase, for copies of escrow papers.

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Real Estate (contd)

• Use your current property tax statement for land
  vs. building ratios. If not available, contact
  the county assessors office.
  
• Check with a local appraiser or real estate
  companies for a list of comparable sales to
  determine the fair market value within the same
  neighborhood.
• Contact contractors used for records that would
  assist you.

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Real Estate (contd)

• For inherited property, check court records for
  probate values.
  
• Check with county assessors office for old
  records about the property.
  
• Copy of the deed for the property

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Real Estate (contd)

• If the home was custom built, contact the
  contractor to see if records are available.
  
• Most insurance policies list a value of the
  building to establish a base figure for
  replacement value insurance.
  
• Get written accounts from friends and relatives
  who saw the house before and after any
  improvements.

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Personal Property

• Make a diagram or floor plan of the property and
  include where furniture was placed. Also include
  any bookcases, where pictures were located and
  shelves including personal items.
• Reconstruct from the original cost invoices or
  old sales catalogs. Fair Market Value can be
  determined through local thrift stores, local
  news papers and the library.
• Try to locate photographs of electronics,
  computers, appliances, clothing, jewelry, etc

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Personal Property

• Valuation Guide
• www.salvationarmysouth.org/valueguide.htm
• Worksheets to compute values
• www.bankrate.com/brm/itax/Edit/News/stories/news_2
  0000107a.asp
  
• Worksheets to determine losses
• Publication 2194 and 2194B

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Vehicles

• Valuation services are available on internet.
• Contact selling dealer or lender for a copy of
  the contract. Provide facts about the vehicle
  for a comparable price figure.
  
• Use newspaper ads for the period in which the
  vehicle was purchased to determine the cost.
  
• For reconstruction of vehicle mileage contact
  your dealer or repair location for repair records.

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Business Records

• Inventories get copies of invoices from
  suppliers (invoices should date back at least one
  year).
  
• Obtain copies of last years business returns.
• Furniture Fixtures prepare a diagram or floor
  plan of the business location including
  furnishings, equipment, and inventory locations.

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Business Records (contd)

• If you purchased an existing business, contact
  the broker for a copy of the purchase agreement.
  This should detail out what was acquired.
  
• If the building was constructed, contact the
  contractor for building plans, or the city/county
  planning commissions for copies of plans.

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Disaster Loss Publications

• IRS Disaster Losses Kits contain publications,
  forms, and worksheets that are helpful in
  reporting casualty losses
  
• Publication 2194 - For Individuals
• Publication 2194B - For Businesses

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Losses

• To calculate loss
• Determine
• adjusted basis before disaster
• decrease in fair market value (FMV) as a result
  of disaster
  
• Subtract any insurance or other reimbursement
  received from the smaller of (a) or (b) above
  
• Treas. Regs. 1.165-7(b)

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Losses (contd)

• Casualty losses of personal-use property
• and employee property is limited to
• 100 deductible per event
• 10 AGI limit per annum
• 2 AGI limit if used for business by employee
• 
  IRC 165(h)(1) (2)

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Losses (contd)

• For Presidentially Declared Disaster Areas
• No gain is recognized on any insurance proceeds
  received for unscheduled personal property that
  was part of the contents of a main home.
  
• 
  IRC 1033(h)

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Losses (contd)

• For Presidentially Declared Disaster Areas
• Insurance proceeds received for the home and any
  scheduled property is treated as received for a
  single item of property.
  
• Any proceeds used to replace any type of
  replacement property that is similar or related
  in service or use to the home or contents
  (scheduled or unscheduled) is not recognized
  gain.
• 
  IRC 1033(h)

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Losses (contd)

• Presidentially Declared Disaster Areas
• Disaster relief payments or assistance do not
  reduce casualty loss unless they replace lost or
  destroyed property.
  
• Disaster unemployment payments are unemployment
  and are taxable.
  
• Disaster grants are generally not included in
  income. However, do not include as casualty
  losses any amounts covered by the grant payments.
  
  IRC 139

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Losses (contd)

• Casualty Losses - Adjustments to Basis
• Decrease basis in property by
• any insurance/other reimbursement,
• any deductible loss
• Increase basis in property by
• Amount you spend on repairs that prolong life
  of property, increase value, or adapt it to
  different use.
  
• 
  IRC 1011 1016

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Other

• When to include insurance payments for living
• expenses in income
• Normally living expense payments from insurance
  in excess of the temporary increase in living
  expenses are taxable income included on line 21
  of Form 1040.
• However, none of the insurance payments are
• taxable in a Presidentially declared disaster
• area.
  IRC 123

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FEMA Mitigation Programs

• FEMA Mitigation Payments, NOT includable in
• income
• Flood Mitigation Assistance Program (FMA)
• Pre-Disaster Mitigation Program (PDM)
• Hazard Mitigation Grant Program (HMGP)
• No increase to basis or adjusted basis for
  payments received under these acts
  

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Gains on Casualty

• If you receive an insurance payment or other
• reimbursement in excess of the adjusted
• basis of damaged or destroyed property you
• will have a gain.
• Amount received
• (Adjusted basis)
• Gain
  IRC 1001, 1011

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Gains on Casualty (contd)

• If your main home is destroyed and the
• insurance proceeds result in a gain
• May treat this as a sale of residence subject to
  the same rules.
  
• (If the home was not used or owned for 2 of the
  last five years, a reduced maximum gain exclusion
  will apply.)
  
• 
  IRC 121(d)(5)

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Gains on Casualty (contd)

• Recognized gain may be postponed on a main home
  in a Presidentially Declared Disaster Area if a
  new home is purchased within 4 years of the end
  of the year the disaster occurred,
• or
• The gain may be recognized and reported.
• IRC 1033(h)

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Gains on Casualty (contd)

• Gain does not have to be recognized on
• destroyed/damaged business property if it is
• replaced within two years of the end of the
• tax year in which it is realized.
• Example If payment is received in 2004
  resulting in a gain, property must be replaced by
  12/31/2006 to defer gain.
  
• IRC 1033

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Gains on Casualty (contd)

• Cannot postpone gain if replacement property is
  purchased from a related party.
  
• Applies to
• C Corps
• Partnerships in which more than 50 of the
  capital or profits is owned by a C Corp
  
• All others if the total realized gain for the
  year is over 100,000.
  
• IRC 1033(i)

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Gains on Casualty (contd)

• To defer gain
• Must buy property specifically to replace the
  damaged or destroyed property.
  
• Property acquired by gift or inheritance does not
  qualify.
  
• 
  IRC 1033

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Gains on Casualty (contd)

• Basis of replacement property
• Cost of replacement property
• (Postponed casualty gain)
• Adjusted basis of replacement property
• 
  IRC 1033(b)

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Reporting Casualty Gains/Losses

• Personal-use Property
• Losses go on Form 4684 and carry to Schedule A
  Itemized Deductions
  
• Gains go on Form 4684 and carry to Schedule D
  Capital Gains/Losses

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Reporting Casualty Gains/Losses (contd)

• Business and income producing property
• Gains/Losses are reported on Form 4684 and carry
  to various forms.
  
• Business use of home carries to
• Form 8829
• Other business property carries to
• Form 4797

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Reporting Casualty Gains/Losses (contd)

• Rental Properties
• Report on Form 4684 and then on Form 4797 See
  Form 4684 Instructions, Section B
  
• Have 2 years from close of tax year when you
  realize the gain to replace property and defer
  gain IRC 1033(a)
  
• Casualty/theft Losses are generally not limited
  by Form 8582 (passive losses)
  
• 
  Treas. Reg. 1.469-2(d)(2)(xi)
  

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Reporting Casualty Gains/Losses (contd)

• Insurance reimbursement after deducting
• loss
• If less than expected (and accounted for on
  casualty loss) include difference as loss on
  return for year when you can reasonably say
  youre not getting any more money.
• 
  Treas. Reg. 1.165-1(d)
  

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Reporting Casualty Gains/Losses (contd)

• Insurance reimbursement after filing
• If greater than expected (and accounted for on
  casualty loss) include difference as income in
  the year received.
  
• 
  Treas. Reg. 1.165-1(d)
  

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Net Operating Losses

• Individual or Business casualty losses can
  generate Net Operating Losses (NOLs)
  
• NOLs generated by casualty losses can be carried
  back or forward the same as any other NOL.
  
• Treas. Regs. 1.165-8(d) and
  1.172-3(a)(3)(iii)
  

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Additional Sources of Information

• IRS Publication 547-Casualties, Disasters and
  Thefts
  
• Publication 2194 - For Individuals
• Publication 2194B - For Businesses
• www.irs.gov
• TaxTalkToday.tv Oct. 18, 2005 Show Disaster
  Relief and Form 1099
  

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Hurricane Relief Update

• IR-2005-119, Oct. 11, 2005 IRS advises
  taxpayers about a new law that lifts certain loss
  limitations for Hurricane Katrina victims.
  
• IR-2005-118, Oct. 6, 2005 Penalty relief for
  dyed diesel fuel sold for use or used on the
  highway is further extended.
  
• 2005-115, Oct. 3, 2005 Consumers should protect
  themselves against possible scams that have
  cropped up in the wake of Hurricane Katrina.

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Hurricane Relief Update

• IR-2005-112, Sept. 28, 2005 New law gives
  taxpayers affected by Hurricane Katrina until
  Feb. 28, 2006, to file tax returns and pay any
  taxes due.
• IR-2005-108, Sept. 21, 2005 NAEA and AAA-CPA
  join with IRS to assist taxpayers affected by
  Hurricane Katrina.
  
• IR-2005-105, Sept. 15, 2005 Victims of
  Hurricane Katrina and their families can take out
  loans and hardship distributions from their
  401(k) and similar employer-sponsored retirement
  plans.

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Hurricanes Katrina Rita

• Red Cross reports it has assisted 1,016,130
  individuals and families
  
• Disaster Recovery Center in Lawrenceville,
  Georgia alone assisted over 663 individuals and
  families
  
• Between 9/15/05 and 10/7/05, IRS Stakeholder
  Liaison Field in Georgia assisted 1528 taxpayers
  and distributed 2189 products

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Questions