Tax Article - Hurricane Relief for Business and Individuals

Suspension of Personal Casualty and Theft Loss Limitations

If you or your business has been affected in any way as a result of Hurricanes Rita, Wilma or Katrina, you may be eligible for a number of tax benefits through the Gulf Opportunity Zone Act of 2005 and the Katrina Emergency Tax Relief Act of 2005. The so-called “Go Zones” are in five states: Alabama, Florida, Louisiana, Mississippi, and Texas. The Hurricane Relief Acts are very extensive, so we have decided to highlight some of the more common examples of these acts to provide you with information we feel will benefit you, the first being personal casualty and theft loss.

Removal of Loss Limitations

For taxpayers who suffered casualty or theft losses to property owned for personal use -- which are attributable to Hurricanes Katrina, Rita and Wilma -- a recent change to the tax law removes certain loss limitations.

Ordinarily, to figure a deduction for a casualty or theft loss of personal-use property from a particular disaster, taxpayers must reduce the loss by $100 and also reduce their total casualty and theft losses by 10 percent of their adjusted gross income. Only the excess over these $100 and 10 percent limits is deductible. Recent legislation, however, removes these limits on losses of personal-use property, so that the entire amount of un-reimbursed losses is deductible. These personal casualty and theft losses are treated as a deduction, separate from other casualty and loss deductions.

To qualify, a loss must arise in the Hurricane Katrina disaster area after August 24, 2005 and must be attributable to Hurricane Katrina, or arise in the Hurricane Rita disaster area after September 22, 2005 and must be attributable to Hurricane Rita, or arise in the Hurricane Wilma disaster area after Oct. 22, 2005 and must be attributable to Hurricane Wilma.

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Documentation and Process

The IRS will ask for copies of your latest tax return, estimates of repairs, before and after photographs, appraisals, documentation made for insurance purpose and any other loss documentation you might have. The IRS evaluates your casualty loss by comparing your property’s value before and after the natural disaster. You must calculate your deduction’s value as the lesser of either the reduction in the amount at which, following the disaster, your property would change hands between two, fully knowledgeable parties (also known as fair market value) or your property’s pre-disaster adjusted basis. Then you must subtract any insurance or other reimbursement amounts. The IRS requires taxpayers to file insurance claims before deducting casualty losses. If you use your property for business purposes, you may deduct the entire casualty loss as an ordinary loss in the year the disaster occurred. Penalties for over-valuation of casualty losses can approach 20% of the underpayment or over-valuation.

Further Information

The following is a link to an IRS publication containing information for taxpayers affected by the Hurricanes. This guide will provide you with answers to the most commonly asked questions. Please contact us if you have any specific questions or issues that you might have that are not covered in either of these publications.

http://www.irs.gov/pub/irs-pdf/p4492.pdf

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