Victims of the recent hurricanes are struggling to restore not just their homes, but their financial security which will be impacted by the resulting damages. As accountants, your clients will turn to you to ask how they can recover, if they have not already.
While a financial hit is inevitable, the good news is that the government and the IRS have enacted efforts to lessen disaster victims’ tax burdens. About two weeks ago, President Trump signed legislation which The Washington Post reports “includes five tax relief provisions for victims of Hurricanes Harvey, Irma and Maria.” Some of these provisions can even help those who were unaffected by the storm. In addition, the IRS already has provisions to help those suffering from disaster and ensure that their tax burden is lightened.
Accountants thus must work to understand these provisions, and actively inform clients of potential tax relief methods instead of waiting for the clients to come to them. Here are some of the key provisions to note in terms of tax relief.
Accountants and their clients need to move quickly because the tax provisions providing relief are temporary. For example, the proposed provisions in the new Congressional legislation, formally titled the Disaster Tax Relief and Airport and Airway Extension Act of 2017, will expire in January.
These provisions include allowing individuals with hurricane losses to withdraw funds from their 401(k) without receiving a tax penalty, and makes it easier for individuals to claim a deduction for uncompensated losses in areas affected by the hurricanes. Normally, disaster victims must prove to the IRS that their personal losses from the hurricane exceeded 10 percent of their adjusted gross income to qualify for a deduction. That restriction was removed by the act.
Content seriesView full content series
Individuals outside the hurricane’s path can also benefit. In order to encourage hurricane donations, the act removes limits on charitable tax deductions for hurricane related donations.
In addition to the legislation, President Trump declared the affected areas a disaster zone which results in meaningful but only temporary relief. For example, the IRS stated that it would postpone “various tax filing and payment deadlines that occurred starting on Aug. 23, 2017” until January 31, 2018. This means that if your client is required to file any return or pay any taxes at some point between August 23 and January 31, your client can put off such tasks until January 31. This includes the October 31 deadline for business quarterly payroll and excise tax returns.
In addition to the eventual relief of postponing tax deadlines, accountants should also remind their clients about the casualty loss deduction as part of the IRS’s relief efforts. A casualty loss occurs when the fair market value of an item like a home is reduced by an unfortunate event like a hurricane. When Trump declared a federal disaster, tax payers facing significant losses had the option of either filing a casualty loss as part of next year’s tax return or filing an amended return which would give them immediate relief in the form of a refund.
Unfortunately, the deadline for an amended 2016 return is October 15, and it is practically impossible to get an amended return ready by the deadline. This is especially so because calculating the losses incurred can be a tricky affair. For example, in order to determine the fair market value of a home before and after a hurricane, a competent appraisal must be conducted. Accountants and clients should also note that the costs of repairing the damaged property are not factored as part of the casualty loss, and the casualty loss will always be significantly less than the actual lost value.
Fortunately, the IRS has provided certain tips and factors to consider when calculating the casualty loss. And while filing an amended 2016 return and getting immediate relief for your clients may not be possible, you can still ensure that they can eventually recoup some of the losses with this and other examples of IRS tax relief.
The fact that it is too late to file an amended 2016 return should be a warning that accounting firms need to be already moving to get their clients the best tax relief possible. Most hurricane tax relief will expire in January and accountants and clients will need time to figure out the exact monetary value of what was lost as well as which relief programs will give them the biggest benefit. By waiting until November or December, the picture of what was damaged will grow fuzzier as repairs commence.
Furthermore, accountants must remember that too many individuals and businesses have no idea such relief exists at all. It is thus their responsibility to inform their clients, be proactive, and work with them to ensure that they can get the best deal and recover from these terrible disasters as soon as possible.
Gary Eastwood is a CPA licensed senior accountant from Seattle, Washington. He received his CPA license from the Washington State Board of Accountancy in 2001 before relocating to Onawa, Iowa in 2008. Over more than 15 years of accounting experience, Gary has worked with multinational health service providers and independent CPA firms. He has a proven ability in dealing with business clients from a variety of backgrounds as well as leading companies to greater efficiency and profitability. He is familiar with both US GAAP and China GAAP.