Tax Relief in Disaster Situations

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Tax Relief in Disaster Situations
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Objectives

• To Discuss
• Federal Tax Relief Available to Taxpayers in a
  Disaster Area
  
• Information About Presidentially Declared
  Disaster Areas
  
• Calculating Reporting Disaster Area Losses

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Possible Tax Relief for Disaster Situations

• Special tax law provisions may help taxpayers
  recover financially from the impact of a
  disaster. The IRS may
  
• Grant additional time to file, pay, and perform
  certain other acts during the extension period
  
• Abate interest and late filing or late payment
  penalties
  
• Establish waiver period for employment and
  excise tax

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Tax Relief for Disaster Situations

• Things to consider for a faster refund for
  individuals and businesses in a Presidentially
  Declared Disaster Area
  
• Claim losses related to the disaster on the
  previous year tax return, usually by filing an
  amended return, or
  
• Electronically file original tax return for the
  year the loss occurred

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Filing Options for Presidentially Declared
Disaster Area Losses

• Filing Options
• Tax year of the casualty-
• Claim disaster-related casualty loss in the tax
  year of the casualty, or the prior year, by
  amending the prior year tax return.
  
• Claiming the loss on an original or amended
  return for prior year will entitle the taxpayer
  to an earlier refund, but waiting to claim the
  loss on the return for the year of loss could
  result in a greater tax saving, depending on
  other income factors.

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Filing Requirements for Losses

• Election to take casualty loss in preceding tax
  year must be made by the later of the following
  dates
  
• Due date (without extensions) for filing tax
  return for the tax year in which the disaster
  occurred.
  
• Due date (with extensions) for filing tax return
  for the preceding tax year.
  
• Example A calendar year taxpayer ordinarily
  have until April 15, 2005, to amend 2003 tax
  return to claim a casualty loss that occurred
  during 2004.

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Filing Requirements for Losses (contd)

• How to deduct a loss in the preceding year
• Include statement either on the original
  return or the amended return with the
  following information
  
• - Date or dates of disaster
• - City, Town, County and State of disaster
• Statement can be either on the return or included
  with the return

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Filing Requirements for Losses (contd)

• Once election is made, it can be revoked within
  90 days of making the election.
  
• Must return any refund or credit received from
  making the choice.
  
• If revoked prior to getting refund, must return
  refund within 30 days of receiving it for
  revocation to be effective.

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Presidentially Declared Disaster Areas

• A list of the Presidentially Declared Disaster
  Areas, by State and County, are provided at the
  FEMA (Federal Emergency Management Agency)
  website at
• www.fema.gov
• IRS information about Presidentially Declared
  Disaster Areas can be found at
  
• http//www.irs.gov/newsroom/index.html

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Casualty Determination

• A casualty is the damage, destruction, or loss of
  property resulting from an identifiable event
  that is sudden, unexpected, or unusual.

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Casualty Determination (contd)

• A sudden event is one that is swift, not gradual
  or progressive.
  
• An unexpected event is one that is ordinarily
  unanticipated and unintended.
  
• An unusual event is one that is not a day-to-day
  occurrence and that is not typical of the
  activity in which you were engaged.

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Disaster Area Loss

• A "disaster area loss is a casualty loss that
  occurred in an area determined by the President
  of the United States to warrant Federal disaster
  assistance. These places are known as
  Presidentially Declared Disaster Areas.

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Casualty Loss Proof

• Information needed to support the loss
• The type of casualty (car accident, fire, storm,
  etc.) and when it occurred
  
• The loss was a direct result of the casualty
• You were the owner of the property, or if a
  lessee, you were contractually liable for the
  damage

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Casualty Loss Proof (contd)

• Whether a claim for reimbursement exists for
  which there is a reasonable expectation of
  recovery.
  
• Documented evidence to support the claimed
  allowable loss.
  

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To Prove a Loss

• Records may have to be reconstructed.
• The information gathered will be used for tax
  purposes, as well as insurance reimbursement.

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Prior Year Tax Returns

• If necessary, file Form 4506 to secure copies of
  the previous four years of income tax returns.
  
• The fee is waived if your loss is in a
  Presidentially Declared Disaster Area.
  
• Write in the applicable disaster title
  information in red at the top of F4506 to
  expedite processing and waiver the fees.

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Real Estate

• Take photographs as quickly as possible to
  establish the extent of damage.
  
• Contact the title company, or bank that handled
  the purchase, for copies of escrow papers.

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Real Estate (contd)

• Use your current property tax statement for land
  vs. building ratios. If not available, contact
  the county assessors office.
  
• Check with a local appraiser or real estate
  companies for a list of comparable sales to
  determine the fair market value within the same
  neighborhood.
• Contact contractors used for records that would
  assist you.

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Real Estate (contd)

• For inherited property, check court records for
  probate values.
  
• Check with county assessors office for old
  records about the property.
  
• Copy of the deed for the property

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Real Estate (contd)

• If the home was custom built, contact the
  contractor to see if records are available.
  
• Most insurance policies list a value of the
  building to establish a base figure for
  replacement value insurance.
  
• Get written accounts from friends and relatives
  who saw the house before and after any
  improvements.

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Personal Property

• Make a diagram or floor plan of the property and
  include where furniture was placed. Also include
  any bookcases, where pictures were located and
  shelves including personal items.
• Reconstruct from the original cost invoices or
  old sales catalogs. Fair Market Value can be
  determined through local thrift stores, local
  news papers and the library.
• Try to locate photographs of electronics,
  computers, appliances, clothing, jewelry, etc

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Vehicles

• Valuation services are available on internet.
• Contact selling dealer or lender for a copy of
  the contract. Provide facts about the vehicle
  for a comparable price figure.
  
• Use newspaper ads for the period in which the
  vehicle was purchased to determine the cost.
  
• For reconstruction of vehicle mileage contact
  your dealer or repair location for repair records.

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Business Records

• Inventories get copies of invoices from
  suppliers (invoices should date back at least one
  year).
  
• Obtain copies of last years business returns.
• Furniture Fixtures prepare a diagram or floor
  plan of the business location including
  furnishings, equipment, and inventory locations.

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Business Records (contd)

• If you purchased an existing business, contact
  the broker for a copy of the purchase agreement.
  This should detail out what was acquired.
  
• If the building was constructed, contact the
  contractor for building plans, or the city/county
  planning commissions for copies of plans.

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Disaster Loss Publications

• IRS Disaster Losses Kits contain publications,
  forms, and worksheets that are helpful in
  reporting casualty losses
  
• Publication 2194 - For Individuals
• Publication 2194B - For Businesses

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Losses

• To calculate loss
• Determine
• adjusted basis before disaster
• decrease in fair market value (FMV) as a result
  of disaster
  
• Subtract any insurance or other reimbursement
  received from the smaller of (a) or (b) above

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Losses (contd)

• Casualty losses of personal-use property and
  employee property is limited to
  
• 100 deductible per event
• 10 AGI limit per annum
• 2 AGI limit if used for business by employee

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Losses (contd)

• Presidentially Declared Disaster Areas
• No gain is recognized on any insurance proceeds
  received for unscheduled personal property that
  was part of the contents of a main home.
  

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Losses (contd)

• Presidentially Declared Disaster Areas
• Insurance proceeds received for the home and any
  scheduled property is treated as received for a
  single item of property.
  
• Any property similar or related in service or use
  to the home so converted (or its contents) shall
  be treated as property similar or related in use
  to that single item of property.

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Losses (contd)

• Presidentially Declared Disaster Areas
• Disaster relief payments or assistance do not
  reduce casualty loss unless they replace lost or
  destroyed property.
  
• Disaster unemployment payments are unemployment
  and are taxable.
  
• Disaster relief grants are generally not included
  in income. However, do not include as casualty
  losses any amounts covered by the grant payments.

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Losses (contd)

• Casualty Losses - Adjustments to Basis
• Decrease basis in property by
• any insurance/other reimbursement,
• any deductible loss
• Increase basis in property by
• Amount you spend on repairs that prolong life
  of property, increase value, or adapt it to
  different use.

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Other

• When to include insurance payments for living
  expenses in income
  
• Normally living expense payments from insurance
  in excess of the temporary increase in living
  expenses are taxable income included on line 21
  of Form 1040.
• In the case of a Presidentially declared
  disaster, any payment to an individual to
  reimburse or pay reasonable and necessary
  personal, family, living, or funeral expenses is
  not taxable if it is not otherwise compensated
  for by insurance or otherwise.

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FEMA Mitigation Programs

• FEMA Mitigation Payments, includable in income
• Flood Mitigation Assistance Program (FMA)
• Pre-Disaster Mitigation Program (PDM)
• Hazard Mitigation Grant Program (HMGP)
• No Reduction to Valid Casualty Loss
• Watch For Potential Law Change

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Gains on Casualty

• If you receive an insurance payment or other
  reimbursement in excess of the adjusted basis of
  damaged or destroyed property you will have a
  gain.
• Amount received
• (Adjusted basis)
• Gain

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Gains on Casualty (contd)

• If your main home is destroyed and the insurance
  proceeds result in a gain
  
• You can treat this as a sale of residence subject
  to the same rules.
  
• A reduced maximum gain exclusion will apply if,
  as of the date the home was destroyed, the
  taxpayer
  
• Had not owned the home for 2 years
• Had not occupied the home as a principal
  residence for 2 years or
  
• Had within 2 years previously sold or exchanged
  another principal residence.

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Gains on Casualty (contd)

• If a casualty to your main home is in a
  Presidentially Declared Disaster Area
  
• you can postpone any recognized gain on your
  main home if you buy a new home within 4 years
  after the end of the first tax year in which any
  gain is realized,
• or
• you can recognize the gain and report it.

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Gains on Casualty (contd)

• You do not have to recognize gain on
  destroyed/damaged business property if it is
  replaced within two years of the end of the tax
  year in which gain is realized.
• Example If you received payment in 2004
  resulting in a gain, you must replace property by
  12/31/2006 to defer gain.

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Gains on Casualty (contd)

• Generally, you cannot postpone gain if you buy
  replacement property from a related party.
  
• Applies to
• C Corps
• Partnerships in which more than 50 of the
  capital or profits is owned by a C Corp
  
• All others if the total realized gain for the
  year is over 100,000.

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Gains on Casualty (contd)

• To defer gain
• You must buy property specifically to replace the
  damaged or destroyed property in order to defer
  gain.

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Gains on Casualty (contd)

• Basis of replacement property
• Cost of replacement property
• (Postponed casualty gain)
• Adjusted basis of replacement property

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Reporting Casualty Gains/Losses

• Personal-use property
• Losses go on Form 4684 and carry to Schedule A
  Itemized Deductions
  
• Gains go on Form 4684 and carry to Schedule D
  Capital Gains/Losses

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Reporting Casualty Gains/Losses (contd)

• Business and income producing property
• Gains/Losses are reported on Form 4684 and carry
  to various forms.
  
• Business use of home carries to Form 8829
• Other business property carries to Form 4797

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Reporting Casualty Gains/Losses (contd)

• Rental properties
• Report on Form 4684 and then on Form 4797
• Have 2 years from close of tax year when you
  realize the gain to replace property and defer
  gain
  
• Casualty/theft losses are generally not limited
  by Form 8582 (passive losses)

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Reporting Casualty Gains/Losses (contd)

• Insurance reimbursement after deducting loss
• If less than expected (and accounted for on
  casualty loss) include difference as loss on
  return for year when you can reasonably say
  youre not getting any more money.

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Reporting Casualty Gains/Losses (contd)

• Insurance reimbursement after filing
• If greater than expected (and accounted for on
  casualty loss) include difference as income in
  the year received.

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Net Operating Losses

• Individual or Business casualty losses can
  generate Net Operating Losses (NOLs)
  
• NOLs generated by casualty losses can be carried
  back or forward the same as any other NOL.
  

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Reminders

• Filing Options for Presidentially Declared
  Disaster Area Losses
  
• Taxpayers have the option to claim the
  disaster-related casualty loss on either the
  current year tax return (the year of the
  casualty) or in the prior year by amending the
  prior year tax return.

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Reminders (contd)

• Filing Options for Presidentially Declared
  Disaster Area Losses
  
• Claiming the loss on an original or amended
  return for the prior year will get the taxpayer
  an earlier refund, but waiting to claim the loss
  on the return for the year of loss could result
  in a greater tax saving, depending on other
  income factors.

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Additional Sources of Information

• IRS Publication 547 - Casualties, Disasters and
  Thefts
  
• Publication 2194 Disaster Loss Kit For
  Individuals
  
• Publication 2194B Disaster Loss Kit For
  Businesses
  
• www.irs.gov
• Local IRS Taxpayer Assistance Center

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Questions