In 2005, when Hurricane Katrina hit landfall along the Gulf Coast, Congress considered and passed the Katrina Emergency Tax Relief Act of 2005 in less than two weeks. But this response is not always the norm. For example, “Superstorm” Sandy was the deadliest hurricane on the East Coast since 1972, causing over $65 billion in property damage – 37,000 homes in New Jersey alone were damaged or destroyed.
However, the Hurricane Sandy Tax Relief Act, introduced in December 2012, then updated and re-introduced again as the Hurricane Sandy Tax Relief Act of 2013, has yet to be enacted; nor have any tax breaks for victims of the more recent Hurricane Isaac been authorized.
While the Internal Revenue Service (IRS) often uses its authority to extend filing deadlines and waive certain penalties for taxpayers affected by these types of disasters, it cannot lower tax liability. The inconsistency and uncertainty in the current process, which means that taxpayers in similar situations may receive different tax treatments, prompted the American Institute of CPAs (AICPA) to examine the situation and propose a list of 10 permanent disaster relief tax provisions for Congress to consider.
“By implementing permanent disaster relief provisions as foundational aid,” AICPA Tax Executive Committee Chair Jeffrey Porter wrote, “taxpayers will have certainty, fairness, and the ability to promptly receive the relief they need after a natural disaster, while significantly reducing the administrative burdens on the IRS to react to unexpected disasters.”
Among the proposals, the AICPA suggests that Congress change the law to:
• Extend the Net Operating Loss (NOL) carryback from two years to five years;
• Allow a five-year replacement period (increased from two) for property damaged or destroyed by a disaster event;
• Allow victims of a disaster event to exclude from taxable income the cancellation of debt income for non-business debts, and
• Provide a credit for wages (up to $6,000 in qualified wages per employee) paid to employees who are unable to work because their employer’s business was rendered inoperable.
The AICPA recommends that these provisions take effect immediately when a triggering event occurs.