Disaster Relief Available for Impacted Businesses and Individuals

November 7, 2017

By Mitchell Kopelman, partner-in-charge of Tax; Howard Zandman, partner-in-charge of Litigation Support and Forensic Accounting; and Steven Gluck, tax associate

In the wake of hurricanes in the southern United States and wildfires in California this fall, the IRS and various states have made tax changes to help people and businesses in the affected areas.

We recommend you review this information, which could save money for you and/or your company. Please contact your Aprio advisor with any questions.

Tax Relief Dates

The IRS has given taxpayers in disaster areas until Jan. 31, 2018, to file certain returns and make certain payments due to disasters that occurred:

  • Aug. 23, 2017, for certain counties of Texas, including Harris County where Houston is located;
  • Sept. 4, 2017, in Florida;
  • Sept. 5, 2017, in Puerto Rico and St. Croix, St. John, and St. Thomas of the Virgin Islands;
  • Sept. 6, 2017, for parts of South Carolina;
  • Sept. 7, 2017, for Georgia; and
  • Oct. 8, 2017, for certain areas of California.

This extension applies to affected taxpayers filing most federal tax returns that have either an original or extended due date occurring on the dates given above. Taxpayers will have until Jan. 31, 2018, to file these returns and pay taxes originally due during this period. The postponement does not apply to some forms, including the W-2, 1094, 1095, 1097, 1098, or 1099 series.

Late-deposit penalties on deposits due on or after the dates mentioned above for the U.S. federal disaster areas will be abated as long as the deposits were made by:

  • Sept. 7, 2017, for parts of Texas;
  • Sept. 19, 2017, for Florida;
  • Sept. 20, 2017, for Puerto Rico and the Virgin Islands;
  • Sept. 21, 2017, for South Carolina;
  • Sept. 22, 2017, for Georgia; or
  • Oct. 23, 2017, for parts of California.

The Florida, Georgia, South Carolina and California Departments of Revenue have stated they will follow the tax relief granted by the IRS regarding postponement of return due dates in federally declared disaster areas.

Taxpayers whose IRS address of record is in one of the affected areas will automatically receive filing and penalty relief and do not need to contact the IRS.

Since Aprio’s Atlanta office is in an affected area, our clients qualify for filing and penalty relief even if they are not in a federally declared disaster area. The IRS needs to be notified prior to the filing of your tax return to take advantage of our location by calling 1-866-562-5227.

Accelerated Losses

Businesses can choose to deduct uninsured and unreimbursed (by insurance or otherwise) disaster-related losses on their 2016 tax return instead of 2017. If a business has already filed its 2016 federal tax return, it should consider filing an amended return to accelerate its likely substantial net casualty loss deductions.

Inventory Losses

Taxpayers have two options in accounting for casualties to inventory held for sale to customers. Under the normal accounting method, the taxpayer would recover the lost inventory through its cost of goods sold by reporting the opening and closing inventory for the year. Any reimbursement received in the future from insurance would be added to gross income in the future. The second option would be for the taxpayer to eliminate affected inventory items from cost of goods sold by making an adjustment to the opening inventory of purchases. This deduction must also be reduced by any reimbursements.

For more on inventory losses, see the section below on business interruption insurance.

Involuntary Conversions

Taxpayers receiving insurance proceeds from business property destroyed or “involuntarily converted” in a federal disaster area may be able to invest the money into other tangible property to be held for productive use in a trade or business, instead of having to recognize the insurance proceeds as taxable income. In addition, the proceeds generated from the sale of livestock (except poultry) in excess of what a business would sell under normal conditions could be treated as gains from an involuntary conversion, and not taxed if the proceeds are reinvested in similar property within four years. This involuntary conversion only applies if the client is in a federally-declared disaster area.

Like-Kind Exchanges

Many of our clients engage in like-kind exchanges where they sell property with the intent to reinvest the proceeds into a similar replacement property. Under IRS Code Section 1031, the gains from the sale would not be taxable only if a replacement is identified within 45 days and acquired within 180 days of the sale. However, due to the hurricane, clients may qualify for postponement. Contact Aprio to see if you qualify for postponement on your 1031 exchange.

Retirement Plan Early Distributions

The 10 percent additional tax on early distributions from retirement plans has been waived for up to $100,000 in distributions made on or after varying dates, depending on which disaster you were impacted by, and before Jan. 1, 2019. These distributions must be given to an individual whose principal abode on specified dates was in a disaster area and who sustained an economic loss to their principal abode.

A taxpayer who has received such a distribution may repay the distribution by making additional contributions to a retirement account within three years. The taxpayer also has to include the distribution in gross income by dividing the amount over a three-year period. The repayment would result in an additional deduction equal to the amount withdrawn. You should consult with your Aprio tax advisor on the tax impact related to the timing of your distributions and repayment.

Federal Tax Credit

Aprio’s tax credit and incentive team is helping our clients impacted by the hurricanes take a federal Employee Retention Tax Credit. The credit is equal to 40 percent of “qualified wages” (maximum of $6,000 per employee) paid to an employee whose principal place of employment, on specified dates, was in a hurricane disaster zone and if the business was inoperable during any period of time.

“Qualified wages” are wages which are paid or incurred on or after Aug. 23, 2017, for employers affected by Harvey; Sept. 4, 2017, for employers affected by Irma; and Sept. 16, 2017, for employers affected by Maria. The wages must also be paid or incurred before Jan. 1, 2018, for all employers affected by the hurricanes.

They are paid covering the period from when the business became “inoperable” at its principal location immediately before the hurricane to when the business “resumed significant operations.” The new law does not define “inoperable” or “resumed significant operations.” In order to claim this tax credit, we are consulting with our clients to determine when and if their business was “inoperable” and when they “resumed significant operations” as a result of the disaster. In 2007, the IRS did provide guidance for storms and tornadoes in the Midwest. See excerpts below from the guidance issued in 2007. The IRS may or may not take these same positions for the 2017 disasters:

Q:  When does a business resume “significant operations”?

A: Whether a business has resumed significant operations is a facts and circumstances determination that takes into account the specific nature of the business. Consequently, there is no single answer for all trades or businesses. In making the determination, an employer should use a reasonable and good faith interpretation of what “significant” means in the context of his or her business. Generally, however, the term would not mean that the level of operations has met or exceeded the pre-hurricane level of operations.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

Q: To meet the inoperable requirement, must the building in which the employer conducted an active trade or business be damaged, or can the inoperable requirement be met for other reasons?

A: The statute requires that the business be inoperable “as a result of damage sustained by reason of” the Midwestern Disasters. The damage need not be to the employer’s place of business. For this purpose, a business is inoperable if, for example, because of the disaster, the business is physically inaccessible to employees, raw materials, utilities, or customers.

Similar relief was also provided to employers located in the GO Zone in response to Hurricane Katrina in 2005. For additional information, see Publication 4492. Similar relief was also provided in response to the May 4, 2007, Kansas Storms and Tornadoes. For additional information, see Publication 4492-A.

Here is an example of how beneficial this credit can be. Take a company with 200 employees in a disaster area whose facility was inoperable for five days due to Hurricane Irma:

Days business was inoperable 5
Average employee annual wage $          75,000
Average employee daily wage ($75,000/365 days) $          205.48
Number of employees affected 200
Employee wage average ($205.48 multiplied by five days)* $      1,027.40
Eligible wages ($1,027.40 multiplied by 200 employees) $  205,479.45
Credit percentage 40
Credit ($205,479.45 multiplied by 40%) $    82,191.78
*The amount is computed at the employee level and is limited to $6,000 per employee.
** You may not be able to claim this credit for wages also utilized to claim the Work Opportunity Tax Credit (WOTC).

This credit would be claimed to offset federal income tax for a corporation or passed through to owners of an S-corporation or LLC. The IRS has not yet published any drafts of forms or instructions in order to claim this credit.

Business Interruption Insurance

Aprio’s Litigation Support and Forensic Accounting team can assist you in preparing your claim for any economic losses that you might have sustained due to either a complete or temporary shutdown of your business, or if you had significant inventory losses caused by an insured peril (e.g. the hurricanes) under your policy of insurance. Our team will review your policy and explore your options with you personally to assist you in assessing what is next.

Charitable Contributions

The limitations on charitable contributions have been temporarily suspended for donations made before Dec. 31, 2017, for relief efforts in the hurricane disaster areas. This means a company could deduct its entire tax liability through its charitable contributions, instead of just the usual 10 percent limitation. Several individual donation limitations have also been suspended. If you have made or are planning to make a substantial donation, please contact your tax advisor at Aprio to analyze the tax impact to you personally.

To take advantage of the suspended limitations, the charitable organization must state on the donation receipt that the donation was for hurricane relief.

Personal Casualty Losses

Limitations on personal casualty losses in the hurricane areas are modified. The requirement for losses to exceed 10 percent of adjusted gross income to qualify for the deduction has been suspended. If you had $100,000 worth of damages from the hurricane and $500,000 of income, you would be able to deduct only $49,900 of the damages as an itemized deduction. You can now deduct the whole $100,000. Your Aprio tax advisor can assist you in determining the tax impact to your loss.

If you have any questions about how you or your company has been impacted by these disasters, please contact your Aprio tax advisor or our Litigation Support and Forensic Accounting team.

Contact Mitchell Kopelman at [email protected], Howard Zandman at [email protected] and Steven Gluck at [email protected].

Further Reading & Citations

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About the Author

Mitchell Kopelman

Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.

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Howard Zandman

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