Looking at pictures of the floods in Charleston, SC, and elsewhere earlier this month made me think about my horrendous experience in Super Storm Sandy several years ago. Individuals and businesses in these and other disasters experience devastating losses that are not fully or even partially covered by insurance.
Tax rules can be helpful in creating savings which can then be used to rebuild. A measure introduced in Congress in the summer, called the National Disaster Tax Relief Act of 2015 (H.R. 3110), is now drawing some attention.
The bill would provide relief retroactively for disasters declared in 2012, 2013, 2014, and 2015. Some of the changes in the bill would apply to individuals while others are for businesses.
Here are some of the proposed rules
- An election to expense qualified disaster expenses (i.e., for the abatement of hazardous substances, removal of debris, demolition, and repair of business-related property);
- An increased deduction for charitable contributions for disaster relief for individual and corporate taxpayers;
- Expansion of the rules for net operating losses attributable to disasters;
- Extension through 2015 of bonus depreciation;
- Allow penalty-free use of funds withdrawn from qualified retirement plans;
- Creation of an additional tax exemption for individuals who are displaced as a result of a federally-declared disaster;
- Allow an exclusion from gross income of imputed income from the cancellation of indebtedness resulting from federally-declared disasters;
- Expansion of the earned income tax credit for affected individuals;
- An increase in the rehabilitation tax credit for buildings affected by a federally-declared disaster;
- Allow an additional allocation of the low-income housing tax credit in 2016 to states affected by a federally-declared disaster occurring in 2012, 2013, 2014, or 2015;
- Allow an exclusion from gross income for disaster mitigation payments received from state and local governments;
- Allow a five-year replacement period for property located in a disaster area for purposes of the exclusion of gain from an involuntary conversion;
- Give employers a business-related tax credit for up to 40% of wages paid to employees in a disaster area; and
- Allow an enhanced tax deduction for medical expenses related to an injury occurring in a disaster area.
The measure has been given only a 1% chance of enactment by GovTrack. However, the AICPA recently sent a letter to Congress in favor the bill. The bill’s sponsor, Tom Reed II (R-NY), is on the House Ways and Means Committee. He’s pushed for similar legislation in prior years and failed, but who knows now?
Here’s my take. If we accept the premise that tax rules should be used to encourage or reward certain behavior or help certain groups of taxpayers (e.g., mortgage interest deduction to spur home sales; bonus depreciation to encourage businesses to make capital investments; work opportunity credit for employers who hire workers from certain targeted groups), then a comprehensive and somewhat permanent solution to help taxpayers impacted by a serious disaster makes sense. It avoids the need for Congress and the IRS to focus attention each and every time something disastrous happens, although the rules would have to be extended beyond 2015.
In the past, we’ve seen major legislation following 9/11, Hurricane Katrina, and the 2008 Midwestern Disasters. Also, the IRS can provide relief in the form of certain extended tax deadlines; find a list of recent actions here.
Unless and until we have major tax reform, a more permanent solution to a recurring problem (national disasters) provides certainty to taxpayers and fewer distractions for Congress and the IRS. I like that!