Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Qualified Disaster Relief Payments: Federal Loans, Charitable Assistance, Etc.

What if I received a Small Business Association (SBA) Disaster Loan for my business or home? How will it affect my taxes?

SBA loans are not treated as income and will not affect your taxes..

I received money from a charitable organization, my employer, and friends to help pay for my temporary housing and other necessary expenses caused by the disaster. Does that count as income on my taxes?

No. These payments are considered "qualified disaster relief payments" and they are not counted as income, regardless of the source, as long as the money went to expenses not covered by insurance or other reimbursements.

Do I have to take "qualified disaster relief payments" into account when I calculate my disaster loss?

Yes. If you receive qualified disaster relief payments that were meant to reimburse you for specific property losses, you should subtract the amount of those payments in calculating your losses in the same way as insurance payments.

I made a contribution to a relief organization helping the victims. Can I claim a deduction for that?

You can claim a charitable contribution deduction only if the relief organization is a Section 501(c)(3) organization. You can check an organization's tax status by visiting the IRS web site at http://www.irs.gov/charities/article/0,,id=96136,00.html. Remember to keep your cancelled check or receipt to substantiate the donation. If you contributed $250 or more, you will also need a tax acknowledgment letter from the organization to claim the deduction. See our blog post for more information: http://moskowitztaxlaw.com/post/2017/09/04/making-an-effective-and-tax-deductible-donation-for-disaster-relief

I gave some money to a co-worker in need because of the Fire. Can I deduct that donation on my taxes?

No. Donations to individuals do not qualify as charitable contributions.

Qualified Disaster Relief Payments.

Qualified disaster relief payments are not included in income to the extent any expenses compensated by these payments are not otherwise compensated by insurance or other reimbursement. Qualified disaster relief payments include payments you receive (regardless of the source) for the following:

  1. Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster,
  2. Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. (A personal residence can be a rented residence or one you own),
  3. Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster.

Qualified Disaster Mitigation Payments.

Qualified disaster mitigation payments made under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act are not included in income. These are payments you, as a property owner, receive to reduce the risk of future damage to your property. You cannot increase the basis in the property or take a deduction or credit for expenditures made with respect to these payments.

When Your Loss Deduction Exceeds Your Income

If your loss deduction is more than your income, you may have a net operating loss (NOL). You don't have to be in business to have an NOL from a casualty. An NOL allows you to carryback losses to previous years tax returns and recover taxes previously paid and also to carryforward losses to future years and avoid paying taxes on income earned in the future. You should consult with your tax attorney about the most advantageous way to utilize the different elections available with NOLs.

Disaster Losses and Gains for Business or Employee Property

I have business property that was destroyed in a disaster. Is the tax loss calculated the same way for business property as for personal use property?

To calculate the amount of disaster loss from business property, take the lesser of the adjusted basis of the property or the decrease in fair market value due to the disaster and subtract any insurance or other reimbursement that has been received or is expected. Business disaster losses are not subject to the $100 or the 10% adjusted gross income reductions that apply to individuals.

Can a business elect to claim a disaster loss in the prior year?

Yes. Businesses, like individuals, may elect to deduct disaster losses in the prior year by filing an amended return.

What about gain from the receipt of insurance proceeds in excess of the adjusted basis of business property destroyed in a disaster? Is that calculated the same way as with respect to personal use property?

If business property is destroyed and the insurance payments exceed the adjusted basis, there is a gain for tax purposes. The business may elect to postpone the gain by buying replacement property with a cost equal to or more than the insurance payments for business use within two years of the end of the tax year in which the gain was realized.

I was required to purchase special uniforms for work and they were destroyed. Are there any special rules for deducting their loss on my taxes?

The loss of property you used as an employee should be included in your “miscellaneous itemized deductions,” which are deductible if you itemize deductions to the extent they exceed 2% of your adjusted gross income.