Federal Taxes Weekly Alert, 10/05/2017

Federal Taxes Weekly Alert, 10/05/2017

Checkpoint Special Study: Tax Provisions in the 2017 Disaster Tax Relief Bill

H.R. 3823, the “Disaster Tax Relief and Airport and Airway Extension Act of 2017.”

OnSeptember29,PresidentTrumpsignedintolawH.R.3823,the“DisasterTaxReliefandAirportandAirwayExtension Act of 2017.” The Act, which had been passed by Congress the day before, provides temporary tax relief to victims of HurricanesHarvey,Irma,andMaria.Businessesthatqualifyforreliefmayclaimanew“employeeretentiontaxcredit”of upto$2,400forqualifiedwagespaidtoeligibleemployees.Reliefforindividualsincludes,amongotherthings,loosened restrictionsforclaimingpersonalcasualtylosses,tax-favoredwithdrawalsfromretirementplans,andtheoptionofusing currentorprioryear'sincomeforpurposesofclaimingtheearnedincomeandchildtaxcredits.

Eased Casualty Loss Rules

Currentlaw.Ataxpayergenerallymayclaimadeductionforanylosssustainedduringthetaxyearandnotcompensated by insurance or otherwise. (Code Sec. 165(a)) For individuals, a personal loss from a casualty is deductible only to the extentthat(1)itexceeds$100,and(2)allcasualtylosses(afterapplicationofthe$100-floor)forthetaxyearexceed10% of adjusted gross income (AGI). (Code Sec. 165(h)) If the disaster occurs in a federally declared disaster area, the taxpayermayelecttotakeintoaccountthecasualtylossinthetaxyearimmediatelyprecedingthetaxyearinwhichthe disasteroccurs.(CodeSec.165(i))Thedeductionforcasualtylossesisanitemizeddeduction.

Newlaw.TheActprovidesreliefinanumberofwaystotaxpayersthatsuffera“netdisasterloss”(below)foranytax year.

“Net disaster loss.” The Act defines a net disaster loss as the excess of “qualified disaster-related personal casualty losses”overpersonalcasualtygains,asdefinedinCodeSec.165(h)(3)(A).Qualifieddisaster-relatedpersonalcasualty losses,inturn,arelossesdescribedinCodeSec.165(c)(3)whicharise:

...intheHurricaneHarveydisasterarea(seebelowforthedistinctionbetween“areas”and“zones”)onorafterAug. 23,2017,andwhichareattributabletoHurricaneHarvey;

. . . in the Hurricane Irma disaster area on or after Sept. 4, 2017, and which are attributable to Hurricane Irma; or

...intheHurricaneMariadisasterareaonorafterSept.16,2017,andwhichareattributabletoHurricaneMaria. (Act Sec.504(b)(3))

ForpurposesoftheAct,adisaster“zone”meanstheportionofthedisasterareadeterminedbythePresidenttowarrant individualorindividualandpublishassistancefromtheFederalGovernmentundertheRobertT.StaffordDisasterReliefandEmergencyAssistanceActbyreasonofthedisaster.Adisaster“area”meansanareawithrespecttowhichamajor disasterhasbeendeclaredbythePresidentbyreasonofthedisaster.(ActSec.501(a))

10%limitationremoved.Fortaxpayersclaiminganetdisasterloss,theActeliminatesthecurrentlawrequirementthat personalcasualtylossesmustexceed10%ofAGItoqualifyforadeduction.

Relief available to non-itemizers. The Act also eliminates the current law requirement that taxpayers must itemize deductionstoaccessthistaxrelief—itdoessobyincreasinganindividualtaxpayer'sstandarddeductionunderCode Sec.63(c)bythenetdisasterloss.

NoreductionfortaxpayerssubjecttoAMT.TheActprovidesthatCodeSec.56(b)(1)(E),whichgenerallydisallowsthe standarddeductionforalternativeminimumtax(AMT)purposes,doesnotapplyfortheportionofthestandarddeduction attributabletothenetdisasterloss.

10%limitationremoved.TheActeliminatesthecurrentlawrequirementthatpersonalcasualtylossesmustexceed10% ofAGItoqualifyforadeduction.

Relief available to non-itemizers. The Act also eliminates the current law requirement that taxpayers must itemize deductionstoaccessthistaxrelief—putotherwise,itincreasesanindividualtaxpayer'sstandarddeductionunderCode Sec.63(c)bythenetdisasterloss.

NoreductionfortaxpayerssubjecttoAMT.TheActprovidesthatCodeSec.56(b)(1)(E),whichgenerallydisallowsthe standarddeductionforalternativeminimumtax(AMT)purposes,doesnotapplyforthenewlyincreasedportionofthe standarddeductionattributabletothenetdisasterloss.

Increasedfloor.Inaddition,theActincreasesthe$100per-casualtyfloorto$500forqualifieddisaster-relatedpersonal casualtylosses.(ActSec.504(b))

Eased Access to RetirementFunds

Currentlaw.Aloanfromaqualifiedemployerplantoaparticipantorbeneficiaryistreatedasaplandistributionunless, amongotherthings:(i)theloanamountdoesn'texceedthelesserof:(A)$50,000,or(B)halfofthepresentvalueofthe employee'snonforfeitableaccruedbenefitundertheplan(however,aloanupto$10,000isallowed,evenifit'smorethan halftheemployee'saccruedbenefit)(CodeSec.72(p)(2)(A));and(ii)theloanisrequiredtoberepaidwithinfiveyears, (CodeSec.72(p)(2)(B)(i))exceptthatalongerrepaymentcanbeusedforaprincipalresidenceplanloan.(CodeSec. 72(p)(2)(B)(ii))

Early(generally,pre-age591/2)withdrawalsfromaqualifiedretirementplanresultinanadditionaltaxequalto10%of theamountswithdrawnthatareincludibleingrossincome.(CodeSec.72(t)(1))Theadditionaltaxappliesunlessthe taxpayerqualifiesforoneofseveralspecificexceptions.(CodeSec.72(t)(2);CodeSec.72(t)(3))

Newlaw.TheActeasesanumberofrulestoallowvictimstomake“qualifiedhurricanedistributions”(below)fromtheir retirementplansofupto$100,000(lessanypriorwithdrawalstreatedas“qualifiedhurricanedistributions”;ActSec.

502(a)(2)(A)).

“Qualifiedhurricanedistribution.”TheActdefinesa“qualifiedhurricanedistribution”asanydistributionfromaneligible retirementplan,asdefinedinCodeSec.402(c)(8)(B)(whichincludesIRAs),made:

...onorafterAug.23,2017,andbeforeJan.1,2019,toanindividualwhoseprincipalplaceofabodeonAug.23, 2017,islocatedintheHurricaneHarveydisasterareaandwhohassustainedaneconomiclossbyreasonofHurricane Harvey;

. . . on or after Sept. 4, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode on Sept. 4, 2017,islocatedintheHurricaneIrmadisasterareaandwhohassustainedaneconomiclossbyreasonofHurricane Irma;and

...onorafterSept.16,2017,andbeforeJan.1,2019,toanindividualwhoseprincipalplaceofabodeonSept.16, 2017, is located in the Hurricane Maria disaster area and who has sustained an economic loss by reason of HurricaneMaria.(ActSec.502(a)(4)

Penaltyrelief.Significantly,theActexceptsqualifiedhurricanedistributionsfromthe10%earlyretirementplanwithdrawal penalty.(ActSec.502(a)(1)

Easedre-contributionandinclusionrules.TheActalsoallowstheamountdistributedtobere-contributedatanytimeover a3-yearperiodbeginningonthedayafterthedistributionwasreceived;(ActSec.502(a)(3)(B))andallowstaxpayersto spread out any income inclusion resulting from such withdrawals over a 3-year period, beginning with the year that any amountisrequiredtobeincluded(orelectout).(ActSec.502(a)(5))

Nowithholding.ForpurposesofthewithholdingrulesunderCodeSec.3405,qualifiedhurricanedistributionsaren't treatedaseligiblerolloverdistributions(which,unlesscertainrequirementsaremet,areotherwisesubjectto20% withholdingunderCodeSec.3405(c)(1)(B)).(ActSec.502(a)(6)(A))

Relief for cancelled home purchases, etc. The Act also allows for the re-contribution of certain retirement plan withdrawals for home purchases or construction, which were received after Feb. 28, 2017 and before Sept. 21, 2017, wherethehomepurchaseorconstructionwascancelledonaccountofHurricaneHarvey,Irma,orMaria.(ActSec.502(b

Eased rules for retirement plan loans. With respect to retirement plan loans, the Act:

...increasesthemaximumamountthataparticipantorbeneficiarycanborrowfromaqualifiedemployerplanunder CodeSec.72(p)(2)(A),from$50,000to$100,000;(Act.Sec.502(c)(1))

. . . removes the “one half of present value” limitation, and delays certain repayment dates; (Act Sec. 502(c)(1)) and

...allowsforalongerrepaymenttermbydelayingtheduedateofthefirstrepaymentbyoneyear(andadjustingthe duedatesofsubsequentrepaymentsaccordingly).(ActSec.502(c)(2))

Charitable Deduction Limitations Suspended

Currentlaw.Anindividualwhoitemizescandeductcharitablecontributionsupto50%,30%or20%ofAGI,depending onthetypeofpropertycontributedandthetypeofdonee).(CodeSec.170(b)(1))Acorporationgenerallycandeduct charitable contributions up to 10% of its taxable income. (Code Sec. 170(b)(2)) Amounts that exceed the ceilings (“excess contributions”) can be carried forward for five years by both individuals and corporations, subject to various limitations and ordering rules. (Code Sec. 170(d)) For individuals, charitable contributions are deductible only as an itemizeddeduction.(Reg.§1.170A-1(a))

New law. For qualifying charitable contributions associated with qualified hurricane relief, the Act:

. . . temporarily suspends the majority of the limitations on charitable contributions in Code Sec. 170(b);

...providesthatsuchcontributionswillnotbetakenintoaccountforpurposesofapplyingCodeSec.170(b)and CodeSec.170(d)toothercontributions;

. . . provides eased rules governing the treatment of excess contributions; and

. . . provides an exception from the overall limitation on itemized deductions for certain qualified contributions.

“Qualified contributions” must be paid during the period beginning on Aug. 23, 2017, and ending on Dec. 31, 2017, in cash to an organization described in Code Sec. 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disasterareas.(ActSec.504(a)(4))Qualifiedcontributionsmustalsobesubstantiated,withacontemporaneouswritten acknowledgethatthecontributionwasoristobeusedforreliefefforts(ActSec.504(a)(4)(A)(ii)),andthetaxpayermust makeanelectionforAct.Sec.504(a)toapply.(ActSec.504(a)(4)(A)(iii)ForpartnershipsandScorporations,theelection ismadeseparatelybyeachpartnerorshareholder.(ActSec.504(a)(4)(C))

Employee Retention Tax Credit for Employers

Current law. Certain business incentive credits are combined into one general business credit (GBC) for purposes of determiningeachcredit'sallowancelimitationforthetaxyear.AGBC(claimedonForm3800)isallowedagainstincome taxforaparticulartaxyearandequalsthesumof:(1)thebusinesscreditcarryforwardscarriedtothetaxyear,(2)the current year GBC, and (3) the business credit carrybacks carried to the tax year. (Code Sec. 38(a)) A list of the componentcreditsofthecurrentyearbusinesscreditisprovidedinCodeSec.38(b).

Newlaw.TheActprovidesanew“employeeretentioncredit”for“eligibleemployers”affectedbyHurricanesHarvey(Act Sec.503(a)),Irma(ActSec.503(b)),andMaria(ActSec.503(c)).Eligibleemployersaregenerallydefinedasemployers thatconductedanactivetradeorbusinessinadisasterzoneasofaspecifieddate(forHurricaneHarvey,Aug.23,2017; Irma,Sept.4,2017;andMaria,Sept.16,2017),andtheactivetradeorbusinessofwhichwas,onanydaybetweenthe specifieddateandJan.1,2018,renderedinoperableasaresultofdamagesustainedbythehurricane.

Ingeneral,thecreditisbetreatedasacreditlistedinCodeSec.38(b),andequals40%ofupto$6,000of“qualified wages”withrespecttoeach“eligibleemployee”ofsuchemployerforthetaxyear.

RIAobservation:Thus,themaximumcreditperemployeeis$2,400($6,000×40%).

RIAillustrationEmployerXisaneligibleemployerintheHurricaneHarveydisasterzone.Xhastwoeligible

employees,AandB,towhomXpaysqualifiedwagesof$4,000and$7,000respectively.Xisentitledtoatotal creditof$4,000;$1,600forthewagespaidtoA($4,000×40%)and$2,400for$6,000ofthewagespaidtoB ($6,000 ×40%).

Aneligibleemployeewithrespecttoaneligibleemployerisonewhoseprincipalplaceofemploymentwiththeemployer wasinHurricaneHarvey,Irma,orMariadisasterzoneasoftherespectivedateabove.

Qualifiedwagesmeanwages(asdefinedinCodeSec.51(c)(1)butwithoutregardtoCodeSec.3306(b)(2)(B))paidor incurred by an eligible employer with respect to an eligible employee on any day after the specified date (above) and beforeJan.1,2018,whichoccursduringtheperiod:(i)beginningonthedateonwhichtheemployer'stradeorbusiness first became inoperable at the principal place of employment of the employee immediately before the respective hurricane, and (ii) ending on the date on which such trade or business has resumed significant operations at such principalplaceofemployment.Qualifiedwagesincludewagespaidwithoutregardtowhethertheemployeeperformsno services, performs services at a different place of employment than such principal place of employment, or performs servicesatsuchprincipalplaceofemploymentbeforesignificantoperationshaveresumed.

Limitations.Anemployeecannotbetakenintoaccountmorethanonetimeforpurposesoftheemployeeretentiontax credit. So, for instance, if an employee is an eligible employee of an employer with respect to Hurricane Harvey for purposesofthecredit,theemployeecannotalsobeaneligibleemployeewithrespecttoHurricaneIrmaorHurricane Maria.(ActSecs.503(a)(4),(b)(4),and(c)(4))

TheActalsoprovidesthatrulessimilartoCodeSec.51(i)(1)(whichdisallowstheworkopportunitytaxcredit,orWOTC, whentheemployeeisconsidered“related”totheemployer)andCodeSec.52(whichprovidesrulesforapportioningthe WOTCamongcommonlycontrolledbusinesses)apply.(ActSecs.503(a)(3),(b)(3),and(c)(3))

Special Rule on “Earned Income” for EITC & CTC Purposes

Currentlaw.UnderCodeSec.32,aneligibleindividualisallowedanearnedincometaxcredit(EITC)equaltothecredit percentageofearnedincome(uptoan“earnedincomeamount”)forthetaxyear.For2017,theearnedincomeamountis

$6,670fortaxpayerswithnoqualifyingchildren,$10,000forthosewithonequalifyingchild,and$14,040forthosewith twoormorequalifyingchildren.

ForpurposesoftheEITC,earnedincomeincludeswages,salaries,tips,andotheremployeecompensation,butonlyif thoseamountsareincludibleingrossincomeforthetaxyear;plusnetearningsfromself-employmentlesstheCode Sec.164(f)deductionforhalfofself-employmenttaxfortheyear.(CodeSec.32(c)(2)(A))

Under Code Sec. 24, individuals can claim a $1,000 child tax credit (CTC) for each qualifying child the taxpayer can claimasadependent.Thechildmustbeunder17andaU.S.citizenorresidentalien.(CodeSec.24(c))Theamountof theallowablecreditisreduced(notbelowzero)by$50foreach$1,000(orfractionthereof)ofmodifiedadjustedgross income(AGIincreasedbyexcludedforeign,possession,andPuertoRicoincome)above:$110,000forjointfilers,

$75,000forunmarriedindividuals,and$55,000formarriedtaxpayersfilingseparately.(CodeSec.24(b))Totheextent theCTCexceedsthetaxpayer'staxliability,thetaxpayeriseligibleforarefundablecreditequalto15%percentofearned incomeinexcessofathresholddollaramount.(CodeSec.24(d))

Newlaw.TheActprovidesthat,inthecaseofa“qualifiedindividual,”iftheearnedincomeofthetaxpayerforthetaxyear which includes the applicable date (i.e., the dates shown in the following paragraph) is less than the taxpayer's earned income for the preceding tax year, then the taxpayer may, for purposes of the EITC and CTC, substitute the earned income for the preceding year for the earned income for the tax year that includes the applicable date. (Act Sec. 504(c) (1))Iftheelectionismade,itappliesforbothCodeSec.24(d)andCodeSec.32purposes.

ForHurricaneHarvey,a“qualifiedindividual”isonewhoseprincipalplaceofabodeonAug.23,2017waslocatedeither in the Hurricane Harvey disaster zone, or in the Hurricane Harvey disaster area and the individual was displaced from theirprincipalplaceofabodebyreasonofHurricaneHarvey.SimilardefinitionsapplyforHurricaneIrma(usingaSept.4, 2017date)andHurricaneMaria(usingaSept.16,2017date).(ActSec.504(c)(2))

In the case of joint filers, the above election may apply if either spouse is a qualified individual. (Act Sec. 504(c)(5)