Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
Current as of January, 2017
When a natural disaster such as Hurricane Katrina in 2004, or some other form of disaster such as the 2001 terrorist attacks, occurs the tax code provides some special provisions that allow deviation from normal tax rules. It is also customary for both IRS and Congress to consider or provide other forms of relief, such as filing period extensions. For example, after Hurricane Katrina Congress passed H.R. 3768, the “Katrina Emergency Relief Act of 2005,” and IRS also provided numerous forms of relief. Many of those are covered in a Worldwide ERC® Alert issued in 2005. Because such efforts are linked to specific disasters, they are beyond the scope of this article. IRS has a number of forms and publications devoted to disaster relief, some of which are referenced below. Others are Publication 1600, Publications 584 and 584B, and Publications 2194 and 2194B. They are available on the IRS website at www.irs.gov.
Some relief provisions of broader scope are discussed below.
Advice for Donations
The IRS provides advice for taxpayers who want to make donations to help disaster victims. On its website at www.irs.gov, under Charities and Non-Profits, the IRS recommends that donors read its Publication 3833, “Disaster Relief,” which also can be downloaded from the IRS site. Publication 3833 was first posted after the September 11, 2001 attacks, and provides useful guidance on identification of qualified donees, and how to make donations.
Disaster Relief Payments
After the September 11, 2001 attacks, Congress enacted new legislation under which qualified disaster relief payments to individuals from either public or private sources (such as the individual’s employer) are excluded from income. Under section 139 of the Code, taxpayers in a presidentially-declared disaster area who receive grants from state programs, charitable organizations, employers, or other sources to cover medical, transportation, or personal living or temporary housing expenses, or expenses incurred for the repair or rehabilitation of a personal residence, or expenses to repair or replace the contents of the residence, are not taxable on these payments. However, payments are taxable to the extent the expense is compensated for by insurance. Payments for lost wages or other income replacement remain taxable. This provision is explained at some length in Rev. Rul. 2003-12, 2003-1 C.B. 283, in Publication 3920, “Tax Relief for Victims of Terrorist Attacks”, and in Publication 547, “Casualties, Disasters, and Thefts.”
Section 139 allows Worldwide ERC® member companies to provide substantial aid to their own employees who are affected by disasters without incurring liability for employment tax. For example, temporary living, home repairs, and other benefits can be provided without tax consequence.
Ending uncertainty caused by a 2004 IRS Legal Memorandum (ILM 200431012, June 29, 2004) that treated as taxable to the recipients grant payments made under FEMA programs to mitigate flood losses by elevating structures located in flood-prone areas, Congress amended section 139 in 2005 to permit exclusion of these payments as well. See section 139(g).
Note, however, that IRS has held that disaster relief grants to businesses do not qualify for exclusion, either under section 139 or as gifts or general welfare payments. See Rev. Rul. 2005-46, 2005-2 C.B. 120.
Disaster Area Losses Deductible Early
Under section 165(i) of the Code, both business and individual taxpayers can elect to deduct casualty losses incurred in presidentially-declared disaster areas on a return or amended return for the year that precedes the year of the loss. That is, taxpayers who suffer casualty losses (for example, to their home or their business inventory) as a result of a disaster can elect to amend their prior year returns to claim the losses early, rather than waiting to claim them on returns that are not filed until the year after the disaster. As a result, taxpayers can get a refund of prior year taxes to assist with replacing or repairing the damaged property. Losses are not deductible, however, to the extent compensated by insurance or otherwise (for example, by disaster relief payments). This provision is explained in more detail in Publication 547, noted above.
The Code permits deduction of personal casualty losses only if they exceed $100 per casualty, and only to the extent they exceed 10% of adjusted gross income. Both of these rules apply whether or not the casualty occurs in a presidentially declared disaster area.