On September 29, President Trump signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 into law. The law is intended to provide tax relief for taxpayers impacted by Hurricanes Harvey, Irma and Maria. One of the stand-out benefits of the legislation relates to providing employers located in the disaster zones with the ability to take a tax credit on certain wages paid during the business down-time related to the Hurricanes. This is especially important for those businesses that were closed because of the storms. The Act also removed the excess of 10% of AGI requirement for the deduction of casualty losses.
The Disaster Tax Relief will:
1. eliminate the current requirement that uncompensated personal casualty losses exceed 10 percent of adjusted gross income to qualify for deduction
2. eliminate the current requirement that taxpayers itemize deductions to access this tax relief
3. provide an exception to the 10-percent early retirement plan withdrawal penalty for qualified hurricane relief distributions
4. allow for the re-contribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters
5. provide flexibility for loans from retirement plans for qualified hurricane relief
6. temporarily suspend limitations on charitable contribution deductions associated with qualified hurricane relief made before December 31, 2017
7. provide a tax credit for 40 percent of wages (up to $6,000 per employee) paid by a disaster-affected employer to each employee from a core disaster area
8. allow taxpayers to use earned income from 2016 to determine the Earned Income Tax Credit and Child Tax Credit for the 2017 tax year
Casualty Loss Rules
Current law – A taxpayer generally may claim a deduction for any loss sustained during the tax year and not compensated by insurance or otherwise. For individuals, a personal loss from a casualty is deductible only to the extent that (1) it exceeds $100, and (2) all casualty losses (after application of the $100-floor) for the tax year exceed 10% of adjusted gross income (AGI).
If the disaster occurs in a Presidentially declared disaster area, the taxpayer may elect to take into account the casualty loss in the tax year immediately preceding the tax year in which the disaster occurs. The deduction for casualty losses is an itemized deduction.
New law – For a taxpayer that has a “net disaster loss” for any tax year, the relief provides in relevant part the elimination of the current law requirement that personal casualty losses must exceed 10% of AGI to qualify for a deduction and increases the $100 limitation per casualty to $500.
Furthermore, it also eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief. In general, qualified disaster-related personal casualty losses are losses which arise in the Hurricane Harvey, Irma and Maria disaster areas.
IRA and Retirement Plan Rules
Current law – A loan from a qualified employer plan to a participant or beneficiary is treated as a plan distribution unless: (i) the loan amount doesn’t exceed the lesser of: (A) $50,000, or (B) half of the present value of the employee’s nonforfeitable accrued benefit under the plan (however, a loan up to $10,000 is allowed, even if it’s more than half the employee’s accrued benefit); and (ii) the loan is required to be repaid within five years, except that a longer repayment can be used for a principal residence plan loan. Early (generally, pre-age 59 1/2) withdrawals from a qualified retirement plan result in an additional tax equal to 10% of the amounts withdrawn that are includible in gross income. The additional tax applies unless the taxpayer qualifies for one of several specific exceptions.
New law – The Act allows tax-favored withdrawals from retirement plans, up to $100,000 (less any prior withdrawals treated as qualified hurricane distributions; by: 1) providing an exception to the 10% early retirement plan withdrawal penalty for “qualified hurricane distributions”; and 2) allowing the amount distributed to be re-contributed at any time over a 3-year period beginning on the day after the distribution was received.
The relief also allows for the re-contribution of certain retirement plan withdrawals for home purchases or construction, which were received after Feb. 28, 2017 and before Sept. 21, 2017, where the home purchase or construction was cancelled on account of Hurricane Harvey, Irma, or Maria.
With respect to retirement plan loans, the Act 1) increases the maximum amount that a participant or beneficiary can borrow from a qualified employer plan under from $50,000 to $100,000; 2) removes the “one half of present value” limitation, and delays certain repayment dates; and 3) allows for a longer repayment term by delaying the due date of the first repayment by one year and adjusting the subsequent repayments accordingly.
A “qualified hurricane distribution” is any distribution from an eligible retirement plan made, during a certain time period, to an individual whose principal place of abode is located in the Hurricane Harvey, Irma and Maria disaster area.
Charitable Deduction Limitations Suspended
Current law – An individual who itemizes can deduct charitable contributions up to 50%, 30% or 20% of AGI, depending on the type of property contributed and the type of donee). A corporation generally can deduct charitable contributions up to 10% of its taxable income. Amounts that exceed the ceilings (“excess contributions”) can be carried forward for five years by both individuals and corporations, subject to various limitations and ordering rules. For individuals, charitable contributions are deductible only as an itemized deduction.
New law – For qualifying charitable contributions associated with qualified hurricane relief, the law temporarily suspends the majority of the limitations on charitable contributions. The law provides that i) such contributions will not be taken into account for purposes of applying the percentage limitations and carryover rules to other contributions; ii) provides eased rules governing the treatment of excess contributions; and iii) provides an exception from the overall limitation on itemized deductions for certain qualified contributions.
“Qualified contributions” must be paid during the period beginning on Aug. 23, 2017, and ending on Dec.31, 2017, in cash to a qualified organization for relief efforts for Hurricane Harvey, Irma, or Maria disaster areas. The 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 the relief to apply. For partnerships and S corporations, the election is made separately by each partner or shareholder.
Employee Retention Tax Credit for Employers
Current law – Certain business incentive credits are combined into one general business credit (GBC) for purposes of determining each credit’s allowance limitation for the tax year. A GBC (claimed on Form
3800) is allowed against income tax for a particular tax year and equals the sum of: (1) the business credit carryforwards carried to the tax year, (2) the current year GBC, and (3) the business credit carrybacks carried to the tax year.
New law – The Act provides a new “employee retention credit” for “eligible employers” affected by Hurricanes Harvey, Irma, and Maria (generally defined as employers that conducted an active trade or business in a disaster zone on the date of the disaster and the active trade or business of which, for some period of time following the disaster, was rendered inoperable). In general, the credit is be treated as a credit listed in Code Sec. 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.
“Earned Income” for EITC & CTC Purposes
Current law – An eligible individual is allowed an earned income tax credit (EITC) equal to the credit percentage of earned income (up to an “earned income amount”) for the tax year. For 2017, the earned income amount is $6,670 for taxpayers with no qualifying children, $10,000 for those with one qualifying child, and $14,040 for those with two or more qualifying children. For purposes of the EITC, earned income includes wages, salaries, tips, and other employee compensation, but only if those amounts are includible in gross income for the tax year; plus net earnings from self-employment less the deduction for half of self-employment tax for the year.
Furthermore, individuals can claim a $1,000 child tax credit (CTC) for each qualifying child the taxpayer can claim as a dependent. The child must be under 17 and a U.S. citizen or resident alien. The amount of the allowable credit is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income above: $110,000 for joint filers, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately. To the extent the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% percent of earned income in excess of a threshold dollar amount.
New law – The Act provides that, in the case of a “qualified individual,” if the earned income of the taxpayer for the tax year which includes the applicable date (i.e., the dates shown in the following paragraph) is less than the taxpayer’s earned income for the preceding tax year, then the taxpayer may, for purposes of the EITC and CTC, substitute the earned income for the preceding year for the earned income for the tax year that includes the applicable date.
For Hurricane Harvey, a “qualified individual” is one whose principal place of abode on Aug. 23, 2017 was located either in the Hurricane Harvey disaster zone, or in the Hurricane Harvey disaster area and the individual was displaced from their principal place of abode by reason of Hurricane Harvey. Similar definitions apply for Hurricane Irma (using a Sept. 4, 2017 date) and Hurricane Maria (using a Sept. 16, 2017 date). In the case of joint filers, the above election may apply if either spouse is a qualified individual.
For more information on how any of these rules might benefit you or your business, please contact your tax advisor or Tim Devlin, Tax Services Leader, at [email protected].