In August and September, inpiduals and businesses in two of the most-populous states in the country—Texas and Florida—suffered unprecedented natural disasters: Hurricanes Harvey and Irma. The impact was felt in Louisiana, Georgia, and South Carolina, and shortly thereafter as a result of Hurricane Maria, in Puerto Rico and the U.S. Virgin Islands. Then, in October, parts of California experienced devastating wild fires. For inpiduals and businesses directly impacted by these disasters, it will take time to rebuild; tax rules can help alleviate some of the financial cost. For them, and for businesses throughout the country that were not directly impacted, special tax rules come into play.
Filing extensions for affected businesses and owners
The IRS has extended various due dates for filing returns and paying taxes for taxpayers located in designated disaster areas created by Hurricanes Harvey, Irma, and Maria, or the California wildfires. For example, owners of pass-through entities that obtained filing extensions for their 2016 personal tax returns that had been due on October 16, 2017, now have until January 31, 2018, to file. However, because 2016 taxes on these returns were due on April 18, 2017, any late tax payments are still subject to interest and possibly penalties.
For calendar-year S corporations and partnerships on extension for their 2016 returns (due September 15, 2017), also have until January 31, 2018, to file. Returns filed by the extended due date avoid late filing penalties. Also, quarterly payroll and excise tax returns due on October 31, 2017, can be timely filed by January 31, 2018.
Estimated taxes that were due for owners of pass-through entities and C corporations on September 15, 2017, as well as amounts that will be due on January 16, 2018, for inpiduals (December 15, 2017, for C corporations), will also be considered timely if paid by January 31, 2018.
The IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period applicable to a particular location.
Leave-based donation programs
Many companies enable employees to donate their unused vacation days, sick days, and personal days for use by other employees. Usually employees remain taxable on their donated leave time. However, the IRS has created special rules to help hurricane and wildfire victims. These rules apply to employees and companies throughout the country that want to help these victims.
Employees won’t be taxed on their contributed leave time as long as the employer makes a comparable cash contribution to a charity providing assistance to hurricane victims. The contribution must be made before January 1, 2019. Because the contributed time is not taxable compensation, there are no payroll taxes on this donated leave time.
Retirement plan assistance
The Disaster Tax Relief and Airport and Airway Extension Act of 2017 made a number of favorable changes related to qualified retirement plans. Businesses can choose to make hardship distributions and loans to participants under simplified procedures without causing the plans’ disqualification of tax-exempt status. For example, plans that do not currently allow participants to take loans can make loans and then amend the plan to reflect this action. Loan and hardship distribution relief is also available to plan participants living outside the disaster area who want to help family members in the disaster area.
Usually, hardship distributions are taxable and subject to a 10% penalty for those under age 59½. However, qualified hurricane distributions made before January 1, 2019, won’t be penalized and the income from the distribution can be spread over three years.
Usually, the amount of loans from a qualified retirement plan is capped at the lesser of 50% of the account balance or $50, 000. However, for hurricane-related loans the ceiling is raised to $100, 000 for loans taken by the end of 2018.
Additional rules for hardship distributions and loans are in the text of the law.
Note: The Disaster Relief Act preceded the California wildfires, but the IRS has provided some relief.
Keeping employees on the payroll
The new law creates an employee retention credit for employers affected by the hurricanes (not the wildfires unless Congress takes further action). The credit is 40% of qualified wages up to $6, 000 (top credit of $2, 400). Qualified wages means amounts paid or incurred to an employee before January 1 2018. There’s no limit on the number of workers for which the credit can be claimed.
Reporting gains or losses from destruction to business property
Businesses that suffered losses due to property damage or destruction may have a net operating loss (NOL) that can be carried back to generate an immediate tax refund. This infusion of cash can be used to rebuild. Usually, an NOL has a two-year carryback period, but for those in federally-declared disaster areas, the carryback period is three years. If the losses aren’t used up, they can be carried forward for up to 20 years.
While it seems counterintuitive, businesses may have gains from the damage or destruction of property (called involuntary conversions). This results when insurance proceeds and other reimbursements exceed the adjusted basis of the property. Remember that depreciation and other write-offs may have reduced the adjusted basis to zero or at least considerably below current values to which insurance is pegged.
When there is an involuntary conversion, business owners can elect to avoid immediate gain recognition by reinvesting the proceeds received into “replacement property” (property that is similar or related in service or use to the old property) or repairing the old property. Follow IRS guidance on making this election.
Conclusion
Businesses nationwide can also help hurricane or wildfire victims and receive a tax break by making donations to tax-exempt organizations providing assistance. Keep in mind that the new law waives the adjusted gross income limitations on charitable contributions made before 2018 by inpiduals and the taxable income limit on C corporations, but only with respect to hurricane relief. Resources for donations and other hurricane-related actions:
- For businesses seeking to avail themselves of disaster-specific tax breaks, check on disaster designations listed by the IRS.
- For anyone wanting to make charitable contributions, be sure to avoid fake charity scams and donate only to IRS-approved charities listed here.
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