On September 29th, President Trump signed the Disaster Tax Relief Act, intended to “provide targeted tax relief for taxpayers impacted by Hurricanes Harvey, Irma and Maria.”
This new law addresses the immediate needs of disaster victims as they rebuild their homes and businesses. The act benefits eligible taxpayers living or owning businesses in federally declared disaster areas. This comes in addition to the tax relief that the IRS has previously issued.
Here are some of the main details of Disaster Tax Relief Act:
Employee Retention Credit for Employers Affected by Hurricane Harvey
Employers with a business or trade that was rendered inoperable by one of the storms can claim a tax credit equal to 40% of the wages paid to an employee (up to $6,000 of wages) whose principal place of employment was in a disaster area. The credit applies to wages paid during the period the business remains inoperable until it resumes significant operations, ending no later than January 1, 2018, and would apply whether or not the employee provides services at the principal place of employment or at an alternate location. The damage need not be to the employer’s place of business. For this purpose, a business is inoperable if, for example, because of the disaster, the business is physically inaccessible to employees, raw materials, utilities or customers.
Special Rules for Qualified Disaster Related Personal Casualty Losses
Typically, individuals who suffer a casualty loss in a disaster are only entitled to a tax deduction to the extent that: a) they itemize their deductions and b) the casualty loss exceeds 10% of the their adjusted gross income. This legislation eliminates both of those limitations for losses in any one of the designated disaster areas.
Tax Favored Withdrawals from Retirement Plans
Taxpayers withdrawing from a retirement plan before the year in which they turn 59½ must ordinarily pay income tax on that withdrawal, in addition to a 10% penalty. H.R. 3823 waives the 10% penalty on distributions of up to $100,000 for individuals residing in an affected area who have suffered a loss. Taxpayers who take such withdrawals also have the opportunity to spread the income recognition over three years, and to potentially repay the amount within that same period to avoid tax on the distribution.
Temporary Suspension of Limitations on Charitable Contributions
Businesses and individual taxpayers are ordinarily subject to certain limitations, usually calculated as a percentage of their income, on their ability to deduct charitable contributions. The legislation eliminates those limitations for contributions to be used in relief efforts in areas impacted by the hurricanes. In order to qualify, the taxpayer must produce a contemporaneous, written acknowledgement from the charity, verifying that the contribution is to be used in those efforts.