By Dean Spina
The natural disasters of 2008 left behind a flood of confusion, and we understand it is difficult to stay updated on all the assistance that is available. The attorneys of Bradley & Riley are a knowledgeable resource for individuals and businesses who have questions about disaster-related tax and legal issues.
On October 3, 2008, federal disaster tax relief was adopted. Certain forms of tax relief are available for individual taxpayers affected by disasters occurring in 10 Midwestern states during the period May 20 - July 31, 2008 ("Midwestern Disasters"). Other forms of tax relief are available with respect to qualified disasters (including Midwestern Disasters) occurring in the United States in 2008 or 2009 ("National Disasters"). However, certain forms of tax relief available for National Disasters are not available for Midwestern Disasters.
The forms of tax relief are time sensitive and generally end no later than December 31, 2012. Contact your tax adviser for advice on the specific timelines and the factors that determine if disaster tax relief is available for you or your business. The information below is for information purposes only.*
Disaster Tax Relief for Individuals
The hardest-hit areas in the Midwest were designated for individual assistance, including Linn and Johnson Counties in Iowa (see map). The following individual tax relief is available for with respect to the Midwestern counties designated for individual assistance:
- Casualty loss limitations (described below under National Disasters) are eliminated.
- Employer provided housing may be excluded from a qualified employee's income.
- A new look-back rule for Earned Income Credit and Refundable Child Credit is applicable.
- Cancellation of certain indebtedness is excluded from income.
- The replacement period for damaged or destroyed homes is extended.
- Tax-exempt mortgage bond financing is available for acquisition and amount available for rehabilitation is increased ten fold.
- The Hope Scholarship Credit is doubled in 2008 and 2009 if the school is located in a disaster designated county.
- The Lifetime Learning Credit is increased in 2008 and 2009 if the school is located in a disaster designated county.
- The disaster-related charitable mileage deduction is increased to 70% of the business rate (2008 only).
- Mileage reimbursement up to the standard business mileage rate is excluded from income for charitable mileage attributed to the disaster (2008 only).
The following tax relief is also available with respect to any Midwestern Disaster designated county (see map):
- The 10% penalty for early retirement account distributions is waived for Qualified Disaster Recovery Assistance if made after the disaster date and before January 1, 2010, to an individual: whose primary residence is located in a disaster area and who suffered economic loss on account of the disaster.
- An effective doubling of the limitation on loans from 401(k), 403(b) or 457(b) plans to $100,000 (or amount vested, whichever is less) with a one year delay in payments for a total of 6 years for repaying the loan.
- A new personal exemption of $500 per person (maximum $2,000) is available to those who housed a disaster victim from any disaster designated county provided the housing was rent free for a minimum of 60 days.
- Indebtedness that is discharged for an individual meeting certain requirements is not taxable income if the debt is discharged in response to damage suffered from a Midwestern Disaster.
National Disaster area tax relief for individuals includes a modified casualty loss deduction and a casualty loss deduction for non-itemizers. The general rule is that individual casualty losses are itemized deductions to the extent they exceed $100 per casualty and 10 percent of a taxpayer's Adjusted Gross Income. For National Disasters (excluding Midwestern Disasters) the casualty loss rules are revised to allow more disaster victims to claim individual property losses. The legislation waives the restrictive 10 percent rule and for National Disasters raises the $100 floor to $500, and allows non-itemizers to use these losses as a standard deduction. Note, victims of Midwestern Disasters are denied the non-itemizer deduction for casualty losses.
Additional information is available from Publication 4492-B released on January 14, 2009.
Disaster Tax Relief for Businesses
Below is a summary of tax relief measures that were adopted for businesses.
Bonus depreciation and expensing qualified investment is available for National Disasters, including the Midwestern Disasters, in counties designated for individual disaster assistance. Linn and Johnson Counties are part of this designated area.
- Businesses affected by a qualifying National Disaster may be able to take a 50% bonus depreciation for certain property including nonresidential real property, residential rental real property and property with a recovery period of 20 years or less. Taxpayers must be actively conducting a trade or business. The property must be substantially used in the disaster area.
- Small businesses affected by a qualifying National Disaster may expense an additional $100,000 for qualifying investments that would otherwise be subject to depreciation.
Significant forms of tax relief are available to businesses affected by Midwestern Disasters provided the disaster occurred in a county designated for individual assistance.
- Business tax relief for Midwestern Disasters includes tax-exempt financing, five year net operating loss carry back, an increase in the rehabilitation credit, and expensing 50% of disaster-related costs.
- Over $2.6 billion of bonds may be issued by local governments or the state, at tax-exempt interest rates, for qualifying business uses. The business user must have suffered a physical or economic loss in a trade or business attributed to the Midwestern disaster OR be designated by the Governor as replacing another business that suffered such a loss. Bond proceeds may only be used for nonresidential real property or residential real property (some tenants must meet income limits) or public utility property.
- Certain net operating losses can be carried back five years resulting in possible refunds.
- The rehabilitation credit is increased to 13% for qualified rehabilitated buildings and to 26% for certified historic structures.
- Up to fifty percent of environmental remediation, demolition and cleanup costs may be expensed.
- Businesses with 200 or fewer employees that paid wages while 'inoperable' may take an employee retention credit of up to $2,400 per employee.
* Pursuant to U.S. Treasury Regulations, you are hereby advised that any federal tax advice included in this communication is not intended or written to be used, and cannot be used, to avoid any U.S. federal tax penalties or to promote, market, or recommend to another party any transaction or matter addresses herein. For more information, see IRS Circular 230.
Categories: Business Law