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Hurricane Sandy Federal Tax Relief Programs
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For our clients and friends affected by Hurricane Sandy, we hope for a speedy and complete recovery. To aid with this recovery, the Internal Revenue Service has granted relief. In addition, the federal tax law also provides for relief.
Within each article we share with you images from our staff of how their area was affected by the Super Storm Sandy.
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IRS filing deadline extensions
Who is eligible
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The IRS filing and payment relief applies to taxpayers in the following FEMA-designated localities:
- Connecticut: Fairfield, Middlesex, New Haven, and New London (including the Mashantucket Pequot and Mohegan Tribal Nations located within New London County);
- New Jersey: Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, Somerset, and Union;
- New York: Bronx, Kings, Nassau, New York, Richmond, Suffolk, Queens, and Westchester.
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IRS filing extensions
What are they
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The tax relief postpones various tax filing and payment deadlines for both individual and business taxpayers that occurred starting in late October until February 1, 2013, including:
- Fourth quarter individual estimated tax payments (normally due January 15, 2013).
- Payroll and excise tax returns and accompanying payments for the third and fourth quarters (October 31, 2012 and January 31, 2013, respectively).
- Tax-exempt organization returns (a calendar year tax-exempt organization would have an extended due date of November 15, 2012).
In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster start date and before November 26th, if the deposits are made by November 26, 2012.
Beyond the tax relief provided by law to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. All workers assisting the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are eligible for relief. We recommend that taxpayers who live outside of the impacted area and think they may qualify for this relief to either contact your DDK advisor or the IRS at 866-562-5227.
The tax consequences of casualty losses resulting from Hurricane Sandy are discussed below:
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Joseph D'Auria was stuck in Tottenville, Staten Island at his girlfriend's when Sandy struck
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Another image of devastated Tottenville, Staten Island
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| Treatment of government payments |
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Hudson at Michael Vislocky's doorstep in Hoboken, NJ
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Qualified disaster relief payments are generally excludible from your gross income. Qualified disaster relief payments include amounts necessary to cover personal, family, living, or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. However, these payments would reduce your casualty loss deduction. If received in a year after the casualty loss was deducted, then such funds are generally includible in income. However, where the principal purpose of government funds is economic development (e.g., government money is used to make downtown businesses more attractive, not to replace what was lost), the money is not taken into account in determining whether the taxpayer has a casualty loss deduction (see below).
Interest subsidy payments made by a government unit to a lender on behalf of a business (e.g., to help the business return to a pre-disaster debt service level) are generally includible in income and then deducted by the business as interest expense.
Urban revitalization grants to pay for improvements to your property are generally includible in the gross income of the taxpayer. However, in some cases, the taxpayer may be able to defer recognizing gain under the involuntary conversion rules (discussed below).
The costs of applying for a grant may be currently deductible if the grant is applied for and received in the same year. However, if the grant consists of one or more payments over two or more tax years, or if the taxpayer incurs application expenses in one tax year and does not receive the grant money until the next tax year, then the costs (including soft costs of obtaining that income stream) are capital expenses. Thus, whether the cost of applying for a grant is deductible can vary depending upon the timing of the taxpayer's expenditures and the receipt of the grant proceeds. If the taxpayer's application costs are capitalized, the taxpayer can amortize the capitalized costs over the life of the income stream.
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Disaster relief by private foundations
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Sands beach club under water near Rebecca Assaraf
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The IRS also announced that the designation of Hurricane Sandy as a qualified
disaster means that employer-sponsored private foundations may provide disaster relief to employee-victims and their families in areas affected by the hurricane without affecting their tax-exempt status. However, these organizations must follow specific procedures; therefore, please contact your DDK advisor for guidance.
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Casualty loss deduction
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You may be able to deduct losses with respect to property damage or destruction caused by Hurricane Sandy as a casualty loss.
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Determining the amount of the loss
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The method of figuring the deductible amount of casualty losses depends upon the nature of the property involved. In the case of non business property losses and of partial business losses, the deductible amount of the loss is the value of the destroyed portion or the adjusted basis of the property, whichever is less, reduced by any insurance or other compensation received. The value of the destroyed portion is the difference between the value of the property immediately before and immediately after the casualty.
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National Guard assisting in recovery efforts
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In the case of business property that is completely destroyed, the deductible amount of the loss is the adjusted basis of the property minus any salvage value and any insurance or other compensation received or recoverable. This is the case whether or not the fair market value of the business property immediately preceding the total casualty is less than the adjusted basis of the property.
If you submit an insurance or other type of claim and there is a reasonable prospect of recovering on that claim, the loss is not considered sustained and no part of the loss relating to the claim is deductible until there is reasonable certainty about whether or not the reimbursement will be received. Whether a reasonable prospect of recovery exists depends upon your specific circumstances.
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Limitations on the loss deduction
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For personal-use property, the deduction for casualty and theft losses is deductible only to the extent that the loss exceeds $100 per casualty (for purposes of this rule, Hurricane Sandy is considered one casualty), and ten (10) percent of adjusted gross income. For all other property, this limitation does not apply.
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| Year of deduction |
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Tree falls through Raj Katyal's neighbor's house in Sayreville, NJ. Thankfully no one was hurt.
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Generally, a casualty loss is deductible only for the tax year in which the loss is sustained. A loss is treated as sustained during the tax year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in that tax year.
However, you may elect to report losses caused by Hurricane Sandy in the counties enumerated above during 2011, so as to receive a more immediate federal tax benefit. You make this election by filing a 2011 amended return. The election must be made by the later of: (a) the due date (without extensions) for filing the income tax return for the tax year in which the disaster actually occurred; or (b) the due date (with extensions) for filing the income tax return for the preceding tax year.
The IRS will expedite the processing of amended returns notated with the appropriate disaster information, i.e., "New York Hurricane Sandy." The IRS has announced that the time frame is generally sixty (60) days. However, given the magnitude of Hurricane Sandy, departures from this estimate may become the norm.
A casualty loss may also be deductible in a subsequent year if damage to the property becomes worse after the year in which the casualty occurred. For example, a loss was deductible in the year trees were infested by insects and fungi, although infestation was the result of fire casualty in previous year.
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Net operating loss which may result from a casualty loss
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Ann Choi's neighborhood of Lower East Side after Hurricane Sandy
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The deduction resulting from a casualty loss may result in negative taxable income, which would result in a net operating loss. You may be able to elect to amend prior year returns in order to take a deduction with respect to this operating loss. If you do not, then you may be able to reduce future year income by the amount of this net operating loss. Please contact your DDK advisor to determine whether to make this election.
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Deferral of realized gain from involuntarily converted property resulting from presidentially declared disaster
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Leslie Smith's neighborhood of Coney Island was left as a ghost town
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Because of insurance recoveries and governmental aid, you may recognize a gain. If the gain is with respect to personal property (i.e., jewelry) within a principal residence that was destroyed or damaged by Hurricane Sandy, then such gain is not taxable.
With respect to all other gain, the taxpayer has four (4) years to use the insurance proceeds to purchase or repair qualified replacement property (i.e., a personal residence). However, even if you do not meet this four year window, this gain may still not be taxable pursuant to other tax rules; for example, the exclusion of gain realized on principal residences.
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Hazard mitigation program
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Hope for an end. Rainbow over Gowanus canal
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A sale of property to a federal, state, or local government, or to an Indian tribal government, as part of a hazard mitigation program to implement hazard mitigation under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act, will be treated as an involuntary conversion. Mitigation programs are designed to reduce the risk of future losses.
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NOTE:
This discussion is for your general knowledge and is not meant for specific tax advice. Therefore, please consult with your DDK advisor in order to obtain advice that is specifically tailored to you.
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IRS Circular 230 Disclosure:
U.S. federal tax advice in the foregoing message from DDK & COMPANY, LLP is not intended or written to be, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed regarding the transactions or matters addressed. Some of that advice may have been written to support the promotion or marketing of the transactions or matters addressed within the meaning of IRS Circular 230, in which case you should seek advice based on your particular
circumstances from an independent tax advisor.
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