The people affected by Hurricanes Harvey and Irma are currently working through the long arduous process of rebuilding. Hundreds of thousands of individuals and businesses were touched in some way by these storms. Much like Hurricanes Katrina and Sandy before them, the devastation left in the wake of Harvey and Irma will be felt for years to come. Although the tax consequences of these disasters may be the furthest thing from the minds of those affected, the Internal Revenue Service provides businesses and individuals in federally declared disaster areas several avenues of relief.
Taxpayers suffering a loss of property are said to suffer a casualty loss. Casualty losses are governed by I.R.C. § 165, with losses of property in disaster areas specifically mentioned in I.R.C. § 165(i). This code section, along with several publications, set out the rules in which the IRS attempts to help taxpayers deal with their loss. The following are some of the many forms of taxpayer relief the IRS provides to individuals and businesses in disaster areas:
The first form of IRS disaster relief is the ability to extend certain filing and reporting deadlines. This may seem like a small gesture, however it can help prevent major headaches for the taxpayer. For example, a business that was damaged by flooding may not have access to all of the documentation needed to properly file their tax returns. By providing an extension the IRS is allowing extra time for taxpayers in disaster areas to obtain or reconstruct the necessary documentation to substantiate their tax returns.
Another example of this type of relief was recently issued by the U.S. Department of the Treasury. Normally, individuals must file their Report of Foreign Bank and Financial Accounts (FBAR) for calendar year 2016 on or before Oct. 15, 2017. However, individuals living in areas affected by Hurricanes Harvey and Irma have been granted an extension to file their FBAR until Jan. 31, 2018.
The next common form of disaster relief is the ability to deduct casualty losses. Traditionally, taxpayers suffering a casualty loss must deduct it in the year that the loss occurred. However, taxpayers in a federally declared disaster area, such as the areas affected by Harvey and Irma, may take the deduction in the year immediately preceding the loss. This means that taxpayers effected by these storms may be eligible to deduct their losses on their 2016 tax returns.
There are also several limitations to the amount of losses an individual may claim. First, taxpayers receiving insurance or other nonqualified relief payments on their lost property must subtract the amount of payments received from their casualty loss deduction. Secondly, there are three limitations known as the $100 Rule, the 10% Rule, and the 2% Rule. The $100 Rule dictates that a taxpayer must reduce their total loss on personal-use property from a disaster by $100. The 10% Rule further reduces the total loss allowed on personal-use property, after applying the $100 Rule, by 10% of the taxpayer’s adjusted gross income. The 2% Rule requires taxpayers to reduce losses on employee property by 2% of the taxpayer’s adjusted gross income.
Lastly, taxpayers receiving qualified disaster relief payments may not be required to include the payments as income on their tax return. These payments are not includable in income to the extent that the expenses generating the qualified disaster relief payments are not also covered by insurance or another form of reimbursement.
Although these provisions won’t repair all of the damage caused by the recent hurricanes, they are some of the several ways that taxpayers may be able to find tax relief following these federally declared disasters. If you have questions regarding IRS disaster relief issues or other complex tax issues, please contact John Dies, Managing Director of Tax Controversy, at John.Dies@alliantgroup.com.