On September 29, President Trump signed into law H.R. 3823, the “Disaster Tax Relief and Airport and Airway Extension Act of 2017.” The Act provides temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. Businesses that qualify for relief may claim a new “employee retention tax credit” of up to $2,400 for qualified wages paid to eligible employees. Relief for individuals includes, among other things, loosened restrictions for claiming personal casualty losses, tax-favored withdrawals from retirement plans, and the option of using current or prior year’s income for purposes of claiming the earned income and child tax credits.
Eased Casualty Loss Rules
The Act provides relief in a number of ways to taxpayers that suffer a “net disaster loss” (below) for any tax year. The Act defines a net disaster loss as the excess of “qualified disaster-related personal casualty losses” over personal casualty gains. Qualified disaster-related personal casualty losses, in turn, are losses that happened:
- in the Hurricane Harvey disaster area (see below for the distinction between “areas” and “zones”) on or after August 23, 2017, and are attributable to Hurricane Harvey;
- in the Hurricane Irma disaster area on or after September 4, 2017, and are attributable to Hurricane Irma; or
- in the Hurricane Maria disaster area on or after September 16, 2017, and are attributable to Hurricane Maria.
For purposes of the Act, a disaster “zone” means the portion of the disaster area determined by the President to warrant individual and/or public assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the disaster. A disaster “area” means an area with respect to which a major disaster has been declared by the President by reason of the disaster. For taxpayers claiming a net disaster loss, the Act eliminates the current law requirement that personal casualty losses must exceed 10% of adjusted gross income to qualify for a deduction.
Eased Access to Retirement Funds
The Act eases a number of rules to allow victims to make “qualified hurricane distributions” (below) from their retirement plans of up to $100,000 (less any prior withdrawals treated as “qualified hurricane distributions”). The Act defines a “qualified hurricane distribution” as any distribution from an eligible retirement plan, made:
- on or after August 23, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on August 23, 2017, is located in the Hurricane Harvey disaster area and who has sustained an economic loss by reason of Hurricane Harvey;
- on or after September 4, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on September 4, 2017, is located in the Hurricane Irma disaster area and who has sustained an economic loss by reason of Hurricane Irma; and
- on or after September 16, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on September 16, 2017, is located in the Hurricane Maria disaster area and who has sustained an economic loss by reason of Hurricane Maria.
Significantly, the Act exempts qualified hurricane distributions from the 10% early retirement plan withdrawal penalty.
Charitable Deduction Limitations Suspended
For qualifying charitable contributions associated with qualified hurricane relief, the Act:
- temporarily suspends the majority of the limitations on charitable contributions in Internal Revenue Code (IRC) Section 170(b);
- provides that such contributions will not be taken into account for purposes of applying IRC Section 170(b) and 170(d) to other contributions;
- provides eased rules governing the treatment of excess contributions; and
- provides an exception from the overall limitation on itemized deductions for certain qualified contributions.
“Qualified contributions” must be paid during the period beginning on August 23, 2017, and ending on December 31, 2017, in cash to an organization described in IRC Section 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas. Qualified contributions must also be substantiated, with a contemporaneous written acknowledgement that the contribution was or is to be used for relief efforts, and the taxpayer must make an election for Act Section 504(a) to apply. For partnerships and S corporations, the election is made separately by each partner or shareholder.
Employee Retention Tax Credit for Employers
The Act provides a new “employee retention credit” for “eligible employers” affected by Hurricanes Harvey, Irma, and Maria. Eligible employers are generally defined as employers that conducted an active trade or business in a disaster zone as of a specified date (for Hurricane Harvey, August 23, 2017; Irma, September 4, 2017; and Maria, September 16, 2017), and the active trade or business that was rendered inoperable as a result of damage sustained by the hurricane on any day between the specified date and January 1, 2018.
In general, the credit is be treated as a credit listed in IRC Section 38(b), and equals 40% of up to $6,000 of “qualified wages” with respect to each “eligible employee” of such employer for the tax year. An eligible employee with respect to an eligible employer is one whose principal place of employment with the employer was in the Hurricane Harvey, Irma, or Maria disaster zone as of the respective date above. Qualified wages mean wages paid or incurred by an eligible employer with respect to an eligible employee on any day after the specified date (above) and before January 1, 2018, which occurs during the period:
- beginning on the date on which the employer’s trade or business first became inoperable at the principal place of employment of the employee immediately before the respective hurricane, and
- ending on the date on which such trade or business resumed significant operations at such principal place of employment.
Qualified wages include wages paid without regard to whether the employee performs no services, performs services at a different place of employment than such principal place of employment, or performs services at such principal place of employment before significant operations have resumed. An employee cannot be taken into account more than one time for purposes of the employee retention tax credit. For instance, if an employee is an eligible employee of an employer with respect to Hurricane Harvey for purposes of the credit, the employee cannot also be an eligible employee with respect to Hurricane Irma or Hurricane Maria.
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