Taxes and Alternative Funding Sources for Repairs
2017 has seen some of the most destructive hurricanes in history. What comes next is an excruciating period of recovery. For many going back to the normalcy of everyday life seems far away but if you take it step by step, recovery will be just around the corner before you know it! As we dry out, asses the damage and once again establish familiar routines we can start to make thoughtful decisions about the best approach to repairing our homes, replacing our furniture and dealing with our flooded cars. Knowing your financial and tax options at this stage is important to achieving an efficient recovery.
Due to hurricane Harvey, individuals who reside or have a business in counties listed at the bottom of this article may qualify for relief.
IRS Deadline Extensions
The IRS has postponed certain deadlines for taxpayers who reside or have a business in the disaster areas. Certain deadlines falling before Jan. 31, 2018 have been granted additional time to file through Jan. 31, 2018. This extension includes taxpayer who had a valid extension to file their 2016 return that was due October 16, 2017. Not only certain deadline has been extended, there are some additional relief granted by the IRS. The following are general overview of such relief and what to consider.
If you have any loss due to Hurricane Harvey
If you are affected by a “federally declared disaster” you are eligible to claim a casualty loss on your 2016 or 2017 federal tax return.
Many people think “loss” is what you lost in the hurricane and total amount of belongings you lost. But by a tax definition, a casualty loss equals the lesser of what you paid for the property before the hurricane (net of accumulated depreciation, which we usually call adjusted basis) net of any insurance or other reimbursement received or the decrease in the fair market value of the property as a result of the hurricane. Note that the casualty loss will not be allowed if all applicable insurance is not filed for.
Let’s say you have a computer purchased during 2015 at $600 that you lost during the hurricane. Let’s also assume that you received $250 from your insurance company. Your loss is $600-$250 = $350. Now we assume that the market value of the computer before the hurricane was $500 and the market value of the computer is $50 after the hurricane, (spare parts). So, to calculate the loss we would, decrease in the fair market value is $500-$50 = $450. The IRS then makes you claim the lesser of two numbers, in this case $350.
For an individual, the loss may cover a home, household goods, personal possessions, vacation home, and vehicles. Continuing with the example above, $350 would be reduced by $100, an amount set by the tax statute. Then 10% of adjusted gross income (AGI) is subtracted. The resulting amount is the casualty loss amount to be reported as part of itemized deduction. So, $250 ($300 – $100) minus the 10% of AGI would be your resulting line item on your schedule A, itemized deductions. If resulting deductible loss is greater than the total income for that year, it may create a Net Operating Loss (NOL), which can be applied to upcoming years according to NOL rules. One thing to note though is that disaster related hotel room charges, rental car expenses, or clean up expenses are not part of the casualty loss that you calculate.
If the loss is on business and income-producing property, the $100 and 10% AGI subtraction rules discussed above do not apply. This includes rental property. If the property was destroyed entirely, the loss is generally the cost of the property net of accumulated depreciation. If it was damaged but not destroyed, the loss would normally be the decrease in the fair market value up to the adjusted basis.
Now you figured out the amount, you would most likely report such casualty loss on your 2017 tax return. However, if you think that it would be beneficial to report the loss on your 2016 return, you are allowed to do so. If you have not filed your 2016 tax return yet, you could include the loss in your return. If you already filed the 2016 tax return, then you can file amended tax return to reflect losses in your return.
Using Retirement Funds for Harvey Damage
The media tells us that Harvey was a once in a thousand-year flood even. As a result, flooding occurred in places that no one would have ever expected flooding. The unfortunate truth is only 20% of the Harvey flood victims had flood insurance. As a result, many will be looking for funds to help them keep afloat for next several months and pay for the repairs on flooded homes. To help in this endeavor, the IRS announced that 401(k) plans and other similar retirement plans can make loans and hardship distributions to victims of hurricane Harvey and their families. Red tapes for accomplishing this has been relaxed to speed up the availability of funds. Taking a loan is a better decision for your long term financial health in most cases. The retirement plan loan proceeds are tax-free if they are repaid with interest over five or less years. Under current law, you can borrow up to the lesser of $50,000 or half your vested balance. In a hardship distribution, any distribution from your retirement plan would be taxable but and subject to the standard 10% early-withdrawal penalty.
As with all tax return deductions, supporting records are important. If your records were lost in the hurricane, reconstructing them now will be easier than letting your memory fade. Remember that the burden of proof for deductions rests with the taxpayer.
Lost Your Past Tax Returns?
If your copies of previous tax returns were lost in the floods of Hurricane Harvey, the IRS can help.
As part of their tax relief program for Hurricane Harvey victims, the IRS has waived the usual report request fees and will expedite copies of previously filed tax returns for affected taxpayers. Taxpayers should write “Texas, Hurricane Harvey” in red ink at the top of Form 4506 (Request for Copy of Tax Return) or Form 4506-T (Request for Transcript of Tax Return).
Organizing Your Record
Organizing your record going forward maybe last thing on your mind. But whenever disaster strike, we are reminded just how important having your record located in a safe place, and organized can be. The below link will provide you a useful form to help keep track of where your records are stored and who would have a copy if you misplace your records. The contents and descriptions of items are also listed. You could follow this step-by-step.
If you receive penalty letter
Sometimes the IRS makes mistakes and applies penalties and late fees to people they should not. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.
The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.
Issuing 1099 to Service Providers
We expect to see many service providers and contractors working hard in the upcoming months to restore flood damaged homes and business in Houston due to result of Harvey. If your business paid or is expected to pay a vendor more than $600, you will have to issue a 1099 to the vendor at the beginning of next year. The following types of payments are subject to 1099 reporting responsibilities.
• Contracted labor and subcontractor
• Commission and royalty
• Professional services
• Any other sale of personal properties
• Any other services provided
To issue a 1099 to the vendor, you would need vendor’s name, address, and Employer Identification Number. So, before you issue your vendor any form of payment, it would be wise to request W-9, Request for Taxpayer Identification Number and Certification. For more information on 1099 deadlines and penalties for missing the deadline please see out previous post here.
Counties that was affected by disaster that may qualify for relief
Texas Area: Aransas, Austin, Bastrop, Bee, Bexar, Brazoria, Burleson, Calhoun, Chambers, Colorado, Dallas, De Witt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Madison, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tarrant, Travis, Tyler, Victoria, Walker, Waller, Washington, and Wharton Counties.
Florida Area: Alachua, Baker, Bay, Bradford, Brevard, Broward, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist, Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Holmes, Indian River, Jackson, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okaloosa, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Taylor, Union, Volusia, Wakulla, Walton, Washington counties may qualify for tax relief. This represents all 67 counties of Florida.
About the Author – Ashley Burdette, CPA is the Managing Director of Zagotti and Burdette CPA, LLC. She can be reached at ABurdette@znbcpa.com or (832) 800-3347.