By: Emily Elliott, and Amy Sandlin, CPA
When a natural disaster wreaks havoc on your business or home, taxes might be the last thing on your mind, but they may be worth thinking about. In many cases, the IRS provides disaster victim tax relief that can allow you to extend your filing date and payment deadlines and claim losses, giving you the time and resources to focus on recovery.
After the devastating December 2021 tornados that impacted our neighbors in western Kentucky, we are reminded that disasters can happen anywhere and to anyone. Whether you are facing the reality of a disaster or looking into how you might respond to one, below is a review of federal and state adoption of tax relief for disaster victims.
How Do I Know if I Qualify for Disaster Relief?
Both individuals and businesses may qualify for disaster relief. Those living, working, or operating (or relying on income from a flow-through entity operating) in a Federally Declared Disaster area qualify for disaster relief. Additionally, you may qualify if your tax preparer operates in a disaster area and is unable to file or pay on your behalf.
If you have been impacted by a natural disaster and aren’t sure if it’s a Federally Declared Disaster, you can use the Declared Disasters search feature on FEMA’s website.
What Relief is Available to Me if I Have Been Impacted by a Natural Disaster?
Broadly, two main areas of relief are available to taxpayers affected by disasters. These include extensions of time to file returns and pay taxes, and the ability to deduct property losses (these are known as casualty losses).
Extensions of Time to File Returns and Pay Taxes
Individual, partnership, and corporate tax return deadlines may be extended for taxpayers affected by natural disasters. Often, the IRS will not only postpone return filing, but will also extend the due dates for estimated payments and may waive late-payment penalties regarding existing liabilities. Relief provisions will be different for every disaster. The IRS provides a list of guidance by year and disaster on their website.
Property and Casualty Losses
Generally, you are allowed to deduct certain casualty losses in the year the disaster occurred (and occasionally the prior year).
Casualty losses result from the damage or destruction of property from sudden, unexpected natural events. There are three types of casualty losses, and the type will determine what loss you can deduct for tax purposes. The exact definition of these categories is out of the scope of this article, but more information is available in IRS Publication 547.
Casualty loss is meant to measure fair value of property damaged or destroyed by a disaster. It is determined by the smaller of the:
1. cost or basis of property
2. the decline in fair market value (FMV) of the property post-disaster
The smaller of (1) or (2) is reduced by any insurance or other reimbursement you receive or expect to receive.
FMV is measured immediately prior to and after a disaster to determine the decline. There are multiple ways to determine FMV for this calculation – professional appraisal, or the actual cost to restore the property if it has already been restored to its previous state.
For example, if strong winds damaged the shingles on your roof, you may take the cost to have your roof repaired to determine the FMV of your home after a disaster. However, if you plan to have repairs done but they have not been completed, you cannot base FMV off an estimate of the repair cost.
These losses are reported on Form 4868, which is attached to your income tax return.
Since casualty losses are based on FMV and rely on estimations, the IRS advises that taxpayers act in good faith and make reasonable estimations using all available information when calculating. It is essential to keep proper documentation of the facts and circumstances that support the amount of loss incurred
Other Disaster Relief Considerations
Other relief, such as the deduction for disaster-related expenses, may be available. A trusted tax advisor can help you determine what all is available for your situation.
States can choose to adopt federal tax relief provisions for disasters or exclude or alter them, which can create differences in filing and payment deadline for federal versus state governments (and sometimes local governments too). Additionally, some states have unique provisions that may allow for refunds of taxes paid or penalty waiving that activate upon a disaster being federally declared. Careful attention should be paid to ensure you are following the specific guidelines of each jurisdiction and getting the greatest benefit allowed.
Specific Guidance for December 2021 Severe Storm and Tornado Victims
Federal tax relief for taxpayers affected by the severe storms that occurred starting December 10, 2021, is available to taxpayers in Kentucky living or operating in the following counties: Barren, Caldwell, Christian, Fulton, Graves, Hart, Hickman, Hopkins, Logan, Lyon, Marion, Marshall, Muhlenberg, Ohio, Taylor, and Warren. Taxpayers in certain counties of Illinois and Tennessee may also qualify.
The IRS has postponed tax-filing deadlines for affected taxpayers in these areas. The new deadlines for those affected by the December 10, 2021, disasters are now postponed until May 16, 2022. This includes individual and business income tax returns, and quarterly estimated tax payments. Also included in this extension are quarterly payroll and excise tax returns for businesses. Additionally, penalties will not apply on late payments of withholding income tax due between December 10 and 26, 2021, as long as the required payments were made by December 27.
Taxpayers in these areas will be automatically identified by the IRS and filing and payment relief should be applied. However, if you are affected and live or own a business outside the covered disaster area and still qualify (for example, if your tax preparer is located in an affected area), you should call the IRS disaster hotline at 866-562-5227 to request relief.
State Tax Guidance
Kentucky, Tennessee, and Illinois have adopted federal provisions for disaster relief following the severe storms in December and have extended certain state filing and payment deadlines to May 16, 2022.
In Kentucky, the federal disaster declaration has also activated a state provision that allows for a refund of Kentucky sales and use tax paid for building materials installed in the repair or replacement of structures damaged in counties covered under a federal disaster relief declaration. Refunds are eligible for purchases made on or after Dec. 12, 2021, and refund claims must be submitted within three years from the date the area was declared a federal disaster area (Dec. 12, 2024).
The Kentucky extension for filing and payment applies to individual and corporate income tax, income tax withholding, limited liability entity tax returns, and estimated tax payments including the first quarter 2022 payment due in April. It does not apply to sales and other types of taxes. A 30-day extension for filing sales and excise returns is available by request.
Illinois’ provisions are largely the same; however, there are no extensions for sales, use, and excise tax returns.
The Tennessee extension applies to franchise and excise tax returns only.
Kentucky extensions are automatic for those residing or operating in the affected areas. Tennessee and Illinois require an extension request or notification be submitted via email.
Find Tax Relief for Natural Disasters
Natural disasters can wreak havoc on communities, economies, and individuals, but there are provisions in place to lessen the burden and provide relief to taxpayers. If you have any questions regarding disaster tax relief, please contact your local Blue & Co. advisor for assistance.
Our hearts go out to those affected by the devastating tornadoes of December 2021. If you have been affected or want to help victims, please see The American Red Cross site, or consider donating to the Team Western Kentucky Tornado relief fund.