(RIVERWOODS, ILL., September 1, 2005) – Home and business owners who suffer damage or loss to their property or business as a result of Hurricane Katrina are eligible for tax breaks that can help offset those losses, according to CCH Tax and Accounting (CCH), a leading provider of tax and accounting information, software and services (www.tax.cchgroup.com).
“Taxpayers who live in areas most often affected by adverse weather – tornadoes, earthquakes, hurricanes – should be aware that they have a number of important options under the tax law should disaster strike,” said Mark Luscombe, CPA, attorney and principal federal tax analyst for CCH.
Immediate Help From the IRS
The IRS is offering taxpayers some immediate relief in the Louisiana parishes and Mississippi and Alabama counties declared by the President to be disaster areas. Businesses will have until September 23 to make employment and excise tax deposits normally due before that date. For tax returns and other tax payments, an extension period will run until October 31. Taxpayers should write “Hurricane Katrina” in red at the top of forms to qualify for the extension. The IRS web site (www.irs.gov) provides complete and updated information on the program.
Taxpayers in a presidentially declared disaster area who receive grants from state programs, charitable organizations or employers to cover medical, transportation or temporary housing expenses do not have to include these grants in gross income. These expenses include:
- Personal, family, living or funeral expenses incurred as a result of the disaster;
- Expenses incurred for the repair or rehabilitation of a personal residence, or for the repair or replacement of its contents to the extent attributable to the qualified disaster; and
- Payments made by a federal, state or local government in connection with the disaster.
Qualified disaster relief payments do not include:
- Payments for any expense compensated for by insurance or otherwise;
- Payments in the nature of income replacement, such as payments to individuals of lost wages;
- Unemployment compensation; and
- Payments in the nature of business income replacement.
In addition to presidentially declared disaster areas, this exclusion from income is also available to victims of a disaster caused by terroristic or military action and other disasters as determined by the federal, state or local authority and the IRS.
What Is Deductible?
In general, the IRS allows certain deductions on an individual’s income tax following a “casualty,” that is, a loss of property resulting from a sudden, unexpected or unusual event. A taxpayer can deduct the new amount of actual property loss resulting from damage to, or destruction of, property.
In the case of non-business property, the deduction is limited to losses arising from fire, storm, shipwreck or other casualty, such as tornadoes, hurricanes, earthquakes and abnormal flooding. In addition, non-business losses are deductible only to the extent that they exceed $100 and 10 percent of the taxpayer’s adjusted gross income. So a taxpayer with $50,000 of adjusted gross income who experienced a $25,000 casualty loss would be able to deduct $19,900.
“For individuals, this is an itemized deduction, and it will only benefit people whose total itemized deductions are greater than the standard deduction they’re entitled to,” Luscombe noted.
What Information Must Be Provided?
To qualify for a casualty loss deduction, the taxpayer must prove to the IRS that a loss occurred, and that the loss was caused by a casualty. To support a claim, the property owner will need to provide:
- Proof of the nature of the casualty, when it occurred, and that the loss was a direct result of the casualty.
- In the case of depreciable property, the amount of depreciation allowed or allowable.
- Proof he or she owns the damaged property, or is legally responsible for it.
- The fair market value of non-business property just before and after the loss.
- A description of the damaged property and its location.
- Salvage value of the property.
- The cost or other adjusted basis of the property.
- Amount of insurance or other compensation received or expected to be received for property damage. This includes the value of repairs, cleanup and disaster relief without cost by agencies or others.
Taxpayers may also use the cost of repairs to the damaged property as evidence of the loss of value if they can prove that:
- The repairs are necessary to restore the property to its pre-casualty condition.
- The repairs do not cover more than the damage by the casualty.
- The amount spent for such repairs is not excessive. (Estimates from several reputable companies are recommended.)
- The repairs do not make the value of the property greater than it was before the loss occurred.
CCH also urges victims of disasters to consider damage to the property that is an indirect result of the casualty. Destruction of doors, windows, plants and shrubbery are examples.
What’s Not Deductible?
Note that these incidental expenses relating to a casualty are not part of casualty losses:
- Treatment of personal injury;
- Cleanup costs;
- Temporary housing; and
- Car rental.
Determining the Value of Property
Valuation of property is of the utmost importance when determining the amount of loss sustained in the casualty. When tax time arrives, taxpayers will need to be prepared to provide their tax preparer with evidence showing the value of the property’s pre-casualty value. Acceptable evidence includes:
- Canceled checks, vouchers, receipts, purchase contracts and deeds.
- Losses claimed for the destruction of portraits, heirlooms, keepsakes, etc. must be related to their market value, not the replacement value or sentimental value.
- If records have been destroyed, an appraiser’s opinion on the value of the property is needed.
Determining What Tax Year the Loss Should Be Taken
Usually, casualty losses are deductible in the year that they occur, regardless of when the damage is repaired or the property is restored. However, if there is an action for reimbursement against another party, or an insurance claim, the year when the taxpayer can claim the deduction may be postponed.
Special rules come into play if losses occur in presidentially declared disaster areas. In this case, a property owner can elect his or her losses in the year immediately before the tax year when the disaster occurs. This allows taxpayers who suffered losses this year, for example, to get some quick relief by applying the loss to their 2004 tax bill. By filing an amended return, they can receive a refund of 2004 taxes in 2005.
Legislation has also provided greater access to tax-favored mortgage bonds for rebuilding homes in presidentially declared disaster areas.
A taxpayer also can claim casualty losses for personal residences rendered unsafe by reason of certain disasters. The following criteria must be met:
- The residence must be in an area designated a “disaster area” by the President;
- The residence must have been rendered unsafe as a residence because of the disaster; and
- The owner is ordered to demolish or relocate the residence by the state or local government 120 days after the “disaster area” has been declared officially.
Special Benefits for Business Owners
Small business owners also can take advantage of “involuntary conversion rules for disaster damage” that provide further assistance to business owners whose property was damaged, or involuntarily converted, in presidentially declared disasters. Property used in a business that is damaged by a natural disaster is eligible for “non-recognition of gain” under the law, which means that qualified replacement property can be purchased and the gain can be deferred, offering tax relief to disaster victims.
“This provides relief for businesses that are forced to suspend operations for a substantial time due to the property damage,” said Luscombe. “In other words, if a business loses valuable customers during the suspension and the business fails, the owners may want to consider reinvesting their capital in a new business venture.”
For more detailed information about your taxes during times of disaster, consult your local tax preparer.
About CCH Tax and Accounting
CCH Tax and Accounting (www.tax.cchgroup.com), based in Riverwoods, Ill., is the nation’s premier provider of tax and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH Tax and Accounting is a Wolters Kluwer company.
Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.