Hurricane Katrina Tax Relief Act of 2005
On September 23, President Bush signed The Hurricane Katrina Tax Relief Act of 2005. The Act was designed to provide tax relief to affected individuals and to encourage charitable giving in response to Hurricane Katrina. A summary of the main provisions of the Act follows:
Work Opportunity Tax Credit
Under current law, employers hiring individuals from one or more of eight targeted groups are allowed to claim the Work Opportunity Tax Credit (WOTC). The Act temporarily creates a new target group labeled Hurricane Katrina employees. The Hurricane Katrina employees group is composed of individuals who, on August 28, 2005, lived in an area that is now eligible for "individual assistance" or "individual and public assistance" from the Federal Government under the Robert T. Stafford Disaster and Emergency Assistance Act. (To determine if a specific county is included in one of these categories, visit the Federal Emergency Management Agencies website at http://www.fema.gov/news/disasters.fema).
The Work Opportunity Tax Credit generally equals 40% of the first $6,000 of wages paid to the employee in the first year of employment. To qualify for the new credit, an employer must hire a member of the Hurricane Katrina employee group by one of two deadlines. Employers located in an area that is eligible for "individual assistance" or "individual and public assistance" may claim the WOTC with respect to Hurricane Katrina employees hired over the two-year period ending on August 28, 2007. Employers located outside of this area may claim the WOTC with respect to Hurricane Katrina employees hired through December 31, 2005.
Employee Retention Credit
The Act creates a credit for eligible small employers (an average of 200 or fewer employees in the taxable year) located in a disaster area that is eligible for "individual assistance" or "individual and public assistance" under the Stafford Act (described above) and whose trade or business is inoperable on any day after August 28, 2005 and before January 1, 2006, because of damage sustained by Hurricane Katrina. The credit generally equals 40% of the first $6,000 of qualified wages paid to an employee between August 28, 2005 and January 1, 2006 whose place of employment was in such disaster area. "Qualified wages" are defined under the Act to include wages paid on any day after August 28, 2005 and before January 1, 2006, which are paid during the period beginning on the date on which the business first became inoperable and ending on the date on which the business resumed significant operations. Qualified wages include wages paid without regard to whether the employee performs services, performs services at a different place of employment, or performs services at such principal place of employment before significant operations have resumed.
Charitable Giving Incentives
Temporary Increase in Percentage Limitations for Individuals and Companies
Under current law, an individual may deduct charitable contributions to certain charitable organizations (e.g., public charities, certain private foundations, and certain governmental units), to the extent that the contributions do not exceed 50% of the individual's contribution base (defined as the taxpayer's adjusted gross income without regard to any net operating loss carryback). Under the Act, however, the 50% limitation is waived and an individual may deduct cash contributions made to certain charitable organization (including organizations that do not provide Hurricane Katrina relief) during the period beginning on August 28, 2005 and ending on December 31, 2005. The deduction, however, cannot exceed 100% of the individual's contribution base as reduced for charitable contributions made prior to August 28, 2005. Any contribution in excess of the individual's contribution base as reduced for charitable contributions made prior to August 28, 2005, is carried-over to the succeeding five tax years.
In the case of a corporation, current law allows a deduction of up to 10% of the corporation's taxable income. The Act waives the 10% income limitation for cash donations made during the period beginning on August 28, 2005 and ending on December 31, 2005. The donations, however, must be made for relief efforts related to Hurricane Katrina, a requirement not included in the provisions relating to individuals. Contributions in excess of the corporation's taxable income as reduced for charitable contributions made prior to August 28, 2005, are not deductible currently, and instead must be carried-over to the succeeding five tax years.
An individual or corporation must make an election to qualify for these incentives. For S-corporations and companies taxed as partnerships, each partner or shareholder must make the election separately.
The increased limitations under the Act will not apply if the contribution is made for establishing a new, or maintaining an existing, segregated fund or account with respect to which the donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to distributions or investments by reason of the donor's status as a donor.
Increase in Standard Mileage Rate
For purposes of computing the deduction for charitable use of a personal vehicle for provision of relief related to Hurricane Katrina during the period beginning on August 25, 2005 and ending on December 31, 2006, the mileage rate has been changed to a rate equal to 70% of the standard mileage rate in effect on the date of the contribution. The standard mileage rate, for miles driven after September 1, 2005 and before January 1, 2006, is 48.5 cents per mile. For miles driven prior to September 1, 2005, the rate was 40.5 cents per mile. To utilize the increased mileage rate, a taxpayer must meet the substantiation requirements for use of the standard mileage rate and also must substantiate that the expenses are incurred in providing relief related to Hurricane Katrina. If the taxpayer is reimbursed for the use of the personal vehicle, the Act ensures that the taxpayer does not include the reimbursement amount in gross income. A taxpayer who is reimbursed may either take the deduction or receive reimbursement tax-free, but not both.
Deduction of Charitable Donations of Food Inventory Extended to All Types of Businesses
Under current law, only C-corporations are allowed to deduct the cost of food inventory donations made to a 501(c)(3) public charity. The Act extends the deduction for food inventory donations made after August 28, 2005 and before December 31, 2005, to S-corporations, partnerships, and sole proprietorships. The Act, however, generally limits the amount of the deduction for taxpayers other than C-corporations to 10% of the taxpayers' net income for such taxable year from all trades or businesses from which such contributions were made.
Additional Exemption for Housing Individuals Displaced by Hurricane Katrina
The Act creates an additional exemption for an individual taxpayer who provides rent-free housing to any "Hurricane Katrina displaced individual" (defined below). The allowed exemption amount is $500 for each "Hurricane Katrina displaced individual" housed in the taxpayer's principal residence, up to a maximum of $2,000. This additional exemption created by the Act may be claimed in 2005 or 2006, but may be claimed in only one tax year with respect to the same person. If the taxpayer receives any rent or any other amount in connection with the provision of such housing, no exemption amount will be allowed.
A Hurricane Katrina displaced individual is defined in the Act as an individual who, (1) as of August 28, 2005, was a resident of any Hurricane Katrina disaster area (as declared by the President before September 14, 2005, under the Stafford Act), (2) was displaced from his or her residence located in the Hurricane Katrina disaster area, and (3) is provided housing free of charge by the taxpayer in the principal residence of the taxpayer for a period of 60 consecutive days which ends in the taxable year in which the exemption is claimed. The spouse and any of the dependents of the taxpayer are excluded from the definition of "Hurricane Katrina displaced individual."
Exclusion of Certain Cancellation of Indebtedness by Reason of Hurricane Katrina
Generally, amounts realized from the discharge of indebtedness are treated as taxable income. The Act, however, ensures that individuals affected by Hurricane Katrina are not taxed on debt relief related to Hurricane Katrina if the debt is forgiven before 2007. This benefit does not apply to indebtedness that was incurred in connection with a trade or business of a taxpayer. The Act only applies to a person whose principal residence was either located in an area that is now eligible for "individual assistance" or "individual and public assistance" under the Stafford Act (discussed above) or located in an area with respect to which a major disaster has been declared by the President before September 14, 2005, and such person suffered economic loss by reason of Hurricane Katrina. Furthermore, the exclusion does not apply to any discharge of indebtedness to the extent that real property constituting security for such indebtedness is located outside of the Hurricane Katrina disaster area. The exclusion provided by the Act applies to any discharge made on or after August 25, 2005 and before January 1, 2007.
Suspension of Certain Limitations on Personal Casualty Loss
Under current law, an individual who itemizes his or her deductions is allowed to deduct personal casualty losses to the extent they exceed 10% of the individual's adjusted gross income so long as the loss was at least $100. The Act, however, permits an individual to claim all casualty or theft losses attributable to Hurricane Katrina. For purposes of applying the 10% threshold to other casualty or theft losses, losses deductible under the provisions of the Act are disregarded.
Extension of Time to Replace Damaged Property Without Incurring Tax
Under current law, proceeds received with respect to property involuntarily converted, as a result of its destruction in whole or in part, into money, are not taxable as long as they are reinvested in replacement property within two years (with respect to damaged business property) or four years (with respect to damaged principal residences). The Act increases the period for reinvestment of the proceeds received with respect to property involuntarily converted into money as a result of Hurricane Katrina to five years if substantially all of the replacement property that is acquired is located within the area affected by Hurricane Katrina that was declared by the President to be a disaster area prior to September 14, 2005.