When disasters strike, like the recent hurricanes, taxes are not the first thing that comes to mind. Rescuing life, providing relief and restoring individuals and businesses back to normal is what matters. However, for better or worse, taxes do play a part. The disruption and destruction caused by natural disasters to both individuals and businesses make tax relief necessary and helpful to the restoration process.
Key Areas of Federal Tax Relief
At the federal level, there are some key provisions that you need to be aware of such as what qualifies as a disaster area loss, a casualty loss, and qualified disaster relief payments.
Disaster Area Losses
A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance.
Disaster victims in Wisconsin qualify for tax relief. The IRS announced that victims of severe storms, flooding and landslides in Wisconsin counties designated as federal disaster areas qualifying for individual assistance have more time to make tax payments and file returns. The following Wisconsin counties are designated federal disaster areas: Crawford, Dane, Juneau, La Crosse, Monroe, Richland, Sauk and Vernon. For affected counties, the onset date of the disaster was 8/17/18 and the extended filing deadline is 12/17/18. (WI-2018-07)
Disaster victims in California qualify for tax relief. Victims of wildfires in certain California counties that are designated as federal disaster areas qualifying for individual assistance have more time to make federal tax payments and file returns. Other time-sensitive acts also are postponed. Individuals who reside or have a business in Butte, Los Angeles and Ventura counties may qualify for relief. For these counties, the onset date of the disaster was 11/8/18. There is also state tax relief. (CA-2018-13)
A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. If your property is personal-use property or isn't completely destroyed, the amount of your casualty loss is the lesser of:
- The adjusted basis of your property, or
- The decrease in the fair market value of your property as a result of the casualty
If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis. You must reduce the loss, whether it's a casualty or theft loss, by any salvage value and by any insurance or other reimbursements you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation.
Individuals and businesses that suffer losses in a federally declared disaster area may elect to deduct the loss either in the tax year in which it occurred or in the immediately preceding tax year.
If your loss deduction is more than your income, you may have a net operating loss (NOL). You don't have to be in business to have an NOL from a casualty.
A NOL is the amount by which a taxpayer’s business losses exceed its income. For tax years beginning before January 1, 2018, NOLs were able to offset 100% of taxable income and allowed to be carried back two years and carried forward for twenty years. However, TCJA eliminated net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.
Generally, you may deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement.
Qualified Disaster Relief Payments
Qualified disaster relief payments include payments from any source to or for an individual paid as a result of a qualified disaster:
- to pay or reimburse reasonable and necessary personal, family, living, or funeral expenses, including personal property expenses;
- to pay or reimburse necessary expenses incurred for the repair of a personal residence, including one that is rented, or its contents;
- including payments made by a common carrier on account of death or personal physical injury; and
- including amounts paid by a federal, state, or local government to promote the general welfare.
Taxpayers may also obtain audit relief. It has been reported that IRS agents have been informally telling tax professionals that audit and collection activities in disaster areas will be delayed. This is not a formal policy. However, if a taxpayer would like to keep their case going to obtain closure sooner, they can contact the IRS.
Key Areas of State Tax Relief
When disasters strike, generally the states directly involved are the first to provide relief similar to that at the federal level such as the postponement of return due dates and other applicable relief depending on the situation. Other states, not directly affected, generally follow by allowing taxpayers located in federally declared disaster areas or impacted by the disaster to request filing extensions and obtain relief.
Tax relief is expanded for Hurricane Michael and Florence victims. More counties have been added to the list of areas hit by recent hurricanes and storms that are eligible for federal tax assistance. This includes areas in North Carolina, South Carolina, Georgia, Florida and Virginia. Residents will have more time to make tax payments and file returns. Taxpayers in these areas receive the extensions automatically. The IRS will be updating IRS.gov as any additional counties receive major disaster declaration designations from FEMA. IR-2018-202
Taxpayers who reside in or have a business located in counties as specified by the IRS will qualify for the relief. If additional areas are identified by the IRS, relief is also provided to those areas. The relief also applies to taxpayers not in the disaster area, but whose records are located in the disaster area.
For an up-to-date list of tax relief offered by state, contact LBMC or visit http://cost.org/WorkArea/DownloadAsset.aspx?id=96838 and http://www.cost.org/