After Hurricane Harvey’s damaging winds and unprecedented rain totals, part of the Gulf Coast is left with a different sort of storm. The struggle to recover, rebuild and resume daily operations will be a significant hurdle for many from Corpus Christi, Texas, to Houston and into Louisiana. While tragic, Harvey offers opportunities to demonstrate compassion and the best of human nature.
For Those Looking to Help
There are many outlets for helping Hurricane Harvey victims. As additional needs are identified, these outlets only will increase and include less scrupulous individuals or organizations. While we would never discourage compassionate giving, it’s important to exercise caution with unfamiliar organizations requesting donations and meet the substantiation requirements for properly deducting those charitable contributions come tax time. There are resources to help you evaluate an unfamiliar organization by verifying its tax exemption or showing how it operates and spends contributions.
For Those Affected
The Federal Emergency Management Agency (FEMA) has identified areas eligible for individual assistance in response to President Donald Trump’s major disaster declaration.
The covered area currently includes 39 Texas counties:
Additional eligible counties are anticipated as more FEMA damage assessments become available. Updates will be posted to the IRS website.
The IRS announced it’s providing various forms of tax and administrative relief to Hurricane Harvey victims through January 31, 2018. Below are the specific areas where benefits have been offered.
Filing/Payment Deadline Relief
Extensions on return due dates and relief from late payment penalties are provided for taxpayers with an address of record in an identified disaster area. Taxpayers with income tax filing deadlines falling on or after August 23, 2017, will have until January 31, 2018, to file and pay any taxes originally due during this period.
Due date relief includes all federal income, estate gift tax and employee benefit plan returns with extended due dates on or after August 23, 2017, and before January 31, 2018. However, because tax payments related to these returns were due with a timely filed extension prior to August 23, 2017, they aren’t eligible for the late payment penalty relief.
The penalty relief provision applies to estimated tax payments typically due September 15 and January 16, which will both carry a January 31, 2018, due date for eligible taxpayers. Late filing penalty relief typically doesn’t extend to payroll and excise tax deposits but is granted in this case for deposits normally due on or after August 23 and before September 7, 2017, as long as the deposits are made by September 7.
Employers may be able to make qualified disaster relief payments to employees and exclude those payments from the employee’s gross wages under Internal Revenue Code Section 139. These payments can be used to pay reasonable and necessary personal, family, living or funeral expenses as well as expenses to repair or rehabilitate a personal residence or its contents if the expenses are attributable to a qualified disaster.
Employers may also adopt a leave-based donation program where employees can elect to forego vacation, sick, or personal leave in exchange for cash payments made by the employer to charitable organizations providing relief to victims of Hurricane and Tropical Storm Harvey. Donations under these programs are not included as itemized deductions for the donating employee, but the employee’s gross income will not reflect any income related to the donated leave. This can be beneficial in cases where a taxpayer’s itemized deduction for charitable contributions would otherwise be limited. Employers will be permitted to deduct the cash payments as business expenses provided they are made before January 1, 2019.
Retirement Plan Loan/Withdrawal Relief
The disaster declaration eases the administrative burdens of withdrawing or taking a loan from 401(k), 403(b) and 457(b) plans. These changes include streamlined loan procedures and liberalized hardship distribution rules for affected taxpayers and are intended to expedite the taxpayer’s access to available funds. An individual living outside the disaster area but having a son, daughter, parent, grandparent or other dependent living or working in the disaster area also is eligible to take a hardship distribution or plan loan under the streamlined provisions. Keep in mind there’s no preferential treatment assigned to the taxability of these distributions and the customary tax rates and potential early withdrawal penalties will still apply.
A short-term Disaster Unemployment Assistance (DUA) program also exists for affected counties. This applies to displaced employees and self-employed individuals who live or work in or travel through a qualifying disaster area and suffer a disruption or inaccessibility of their workplace as a direct result of Hurricane Harvey. Taxpayers suffering injury or incapacitation or gaining breadwinner status because the head of household died due to Hurricane Harvey also qualify. DUA funds are federally sourced and don’t affect state unemployment programs or employer policies. Benefits are available for periods starting August 27, 2017. Additional information is available on the Texas Workforce Commission website.
Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax returns either in the tax year of the loss or on the prior year’s return. Claiming the loss on an original or amended return for the prior tax year may provide an acceleration of any benefit, but consideration should be given to potential rate differentials between years and other situational considerations for each taxpayer.
State Tax Compliance
The provisions described here apply to federal filing requirements and programs. Texas offers some relief for hotel and sales tax obligations but still requires individual taxpayer requests for any extension of time to file and will handle these requests on a case-by-case basis. This includes Texas franchise tax returns due November 15, 2017. Taxpayers can visit the Texas comptroller website for additional information or contact their BKD advisor.
The Texas comptroller’s office announced that 2017 franchise tax reports with valid extensions to November 15, 2017, will receive an automatic extension to January 5, 2018, for businesses located in counties affected by the hurricane. Businesses located in these federally declared disaster counties don’t need to specifically request this additional extension.
Federal late filing or late payment penalties for qualifying taxpayers should automatically be abated if address requirements are met. If taxpayers receive a penalty assessment despite having a qualifying address of record, they should contact the IRS at the number on their notice to request the abatement under the disaster relief provision.
Taxpayers affected by Hurricane Harvey but residing or having a business outside the covered disaster area should call the IRS disaster hotline at 866.562.5227 to request the above relief. Additional information and contacts are available at disasterassistance.gov. For other concerns specific to your business or tax matters, contact your BKD advisor.