Tax Policy and Disaster Recovery

Tax Policy and Disaster Recovery

Updated September 11, 2018
Tax Policy and Disaster Recovery
At times, Congress has chosen to use tax policy to provide
Temporary Business Tax Relief Enacted Following
relief and support recovery following disaster incidents.
Previous Disasters
This In Focus discusses, in broad terms, disaster-related tax
In the past after certain disasters, bonus depreciation and
policy. Challenges associated with using the tax code to
enhanced expensing provisions have been enacted to reduce
deliver federal financial assistance following natural
the cost of business investment in clean-up and repairs.
disasters are also discussed.
Provisions providing accelerated cost recovery for
leasehold improvements can also reduce the cost for
The Internal Revenue Code contains a number of
businesses making storefront repairs in disaster zones.
permanent disaster-related tax provisions. These include
Other tax policy changes that have been enacted to help
provisions providing that qualified disaster relief payments
businesses affected by some disasters include expanded net
and certain insurance payments are excluded from income,
operating loss (NOL) carrybacks (loss carrybacks allow
and thus not subject to tax. Taxpayers are also able to
taxpayers to offset taxable income in prior tax years),
deduct casualty losses and defer gain on involuntary
lengthened time periods for acquiring replacement property
conversions (an involuntary conversion occurs when
related to an involuntary conversion, and expanded
property or money is received in payment for destroyed
rehabilitation credits for buildings damaged by disasters.
property). The Internal Revenue Service can also provide
administrative relief to taxpayers affected by disasters by
Other provisions that have been enacted following certain
delaying filing and payment deadlines, waiving
past disasters have attempted to support employment. These
underpayment of tax penalties, and waiving the 60-day
include an expanded Work Opportunity Tax Credit
requirement for retirement plan rollovers. The availability
(WOTC) to reduce the cost of hiring employees located in
of certain tax benefits is triggered by a federal disaster
the disaster area and retention credits to offset a portion of
declaration. Before 2017, casualty losses were generally
wages paid to employees by small businesses while
deductible. However, changes made in the 2017 tax
businesses were inoperable following the disaster.
revision (P.L. 115-97) restrict casualty loss deductions to
Temporary tax credits for employer-provided housing have
federally declared disasters.
also been enacted in the past.
Temporary tax-related disaster relief measures were enacted
Other housing-related and general redevelopment
following a number of major disasters that occurred
provisions have been enacted following some past disasters.
between 2001 and 2017. For recent major hurricane events,
For real estate developers, additional low-income housing
temporary tax relief measures were enacted following
tax credits were provided for affected areas. Redevelopment
Katrina and the other Gulf Coast hurricanes of 2005. There
following a disaster has also been supported, in some
was not, however, a comparable package of tax benefits
instances, by expanding new markets tax credits or by
provided following tropical storm Irene in 2011 or
expanding authority for tax-exempt or tax credit bonds.
Hurricane Sandy in 2012. Some general disaster provisions
were available for all disasters declared in 2008 and 2009.
Other provisions might be designed to support specific
Congress also enacted tax relief following Hurricanes
industries or sectors affected by the disaster. For example,
Harvey, Irma, and Maria in 2017. Similar tax relief was
tax provisions for small timber producers and public
provided following the California wildfires in 2017 and
utilities have been included in past disaster tax legislation.
early 2018. The 2017 tax revision (P.L. 115-97) also
included certain provisions that were generally applicable
Disaster Tax Relief for Businesses: Policy
to 2016 or 2017 disasters.
Considerations
One consideration related to tax relief provisions for
Tax Relief for Businesses
business is timing. The tax code is not well-suited to
provide capital for clean-up, rebuilding, or recovery in the
For businesses, hurricanes like Katrina as well as Harvey
short term. Reduced tax liabilities provide a future financial
and Irma caused unprecedented property and earnings
benefit, but do not provide immediate access to capital that
losses. Employee displacement can create labor market
may be needed following a disaster.
challenges that persist over time. Further, longer-term
supply chain disruptions can make it difficult for businesses
For many business-related provisions, the benefit is limited
to resume operations after initial clean-up efforts are
to businesses with positive taxable income. Accelerated
complete.
cost recovery, special deductions, and tax credits provide
limited benefits to businesses with little profit or no tax
liability. Further, the 2017 tax revision provided full and
immediate expensing (bonus depreciation) for equipment
through 2022, and increased expensing for small
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Tax Policy and Disaster Recovery
businesses, limiting the scope for further accelerations of
Disaster Tax Relief for Individuals: Policy
cost recovery. Businesses with limited current income or
Considerations
tax liability may, however, benefit from expanded NOL
Many low- and moderate-income individuals have zero
carrybacks.
individual income tax liability. For these individuals,
additional exclusions from income or deductions will
Some critics question whether certain disaster-related tax
provide little or no relief, as there is no tax burden to
benefits are necessary, given that much of the tax relief
eliminate. Further, low- and moderate-income individuals
accrues to taxpayers who would have rebuilt without
may have limited wealth. Tax provisions designed to
incentives. This critique raises the question of whether
enhance access to certain forms of savings (e.g., retirement
disaster-related tax benefits are intended to encourage
accounts) also provide limited relief to the least well-off.
certain behavior (rebuilding, for example), or with the
primary purpose of providing financial relief for businesses
There are also timing concerns in using the tax code to
affected by the disaster.
provide individuals relief following a disaster. As was
noted for businesses, the tax code does not lend itself to
Tax Relief for Individuals
providing immediate relief.
Tax provisions might be used to provide financial relief to
Charitable Giving Incentives for
individuals who have lost property, income, or both
Disasters
following a disaster.
The charitable sector supports a wide range of activities
Temporary Individual Tax Relief Enacted Following
associated with disaster relief and longer-term recovery. At
Previous Disasters
times, Congress has acted following a disaster to provide
To provide relief for taxpayers experiencing a loss of
additional tax incentives to support the charitable sector.
property, Congress has enacted legislation following certain
past disasters to expand the deduction for casualty losses
Temporary Charitable Provisions Enacted
(beyond what is available under the permanent provision).
Following Previous Disasters
Following some previous disasters, Congress has also acted
To encourage charitable giving in the wake of a disaster,
to expand the NOL carryback period for individual losses
Congress has, in the past, relaxed certain income limitations
and to extend the time period for purchasing replacement
associated with the deduction for charitable giving. The
property under an involuntary conversion.
amount individuals can deduct for charitable use of a
vehicle (the charitable mileage rate) was also temporarily
Following some past disasters, Congress acted in other
increased in response to certain past disasters. Qualifying
ways to change individual income tax policies to
mileage reimbursements have also been allowed to be
accommodate disaster-related circumstances. Specifically,
excluded from income.
in certain instances, an exclusion has been allowed for
certain debt forgiven. Policies have also been enacted, in
Other tax incentives enacted in response to disasters have
some cases, to enhance access to retirement plan funds.
encouraged particular types of charitable giving. Provisions
designed to encourage charitable contributions of food
To address housing issues, some past disaster tax relief
inventory and books were enacted following Hurricane
packages have allowed individuals housing persons
Katrina. The enhanced deduction for contributions of food
displaced by the storm an extra personal exemption and
inventory was later made permanent, while the enhanced
allowed individuals to exclude the value of certain
deduction for book inventory expired in 2011.
employer-provided housing from income. The terms of
mortgage revenue bonds have been relaxed following
Charitable Giving Incentives for Disasters: Policy
certain disasters, allowing certain individuals in the disaster
Considerations
area access to below-rate mortgages financed by these
A key question regarding enhanced deductions for
bonds.
charitable giving is how much additional giving results
from the policy change. Is it the tax benefits that drive
Congress has also acted following certain past disasters to
giving, or individuals’ desire to aid those affected by the
enact provisions that protect certain tax benefits.
storm? Another question is how much giving is for disaster-
Specifically, for the earned income tax credit (EITC) and
related charitable activities, as opposed to other activities or
child tax credit, special provisions have allowed individuals
uses. Charitable giving incentives are often applied broadly,
to use previous years’ earnings when calculating the credit,
and it can be difficult to target them to a particular event or
a policy change that could help those experiencing a loss of
geographic region.
income following the disaster. Education-related tax credits
have also been enhanced as part of certain disaster-related
Another consideration is who benefits from an enhanced
tax packages. Congress has also chosen, as part of disaster
charitable giving deduction. On the individual side, the
tax relief plans, to authorize the Secretary of the Treasury to
value of the tax benefit of the charitable deduction is highly
adjust the application of tax laws to prevent the disaster
concentrated among high-income taxpayers.
from causing taxpayers to lose deductions or tax credits, or
having to change their filing status.
Molly F. Sherlock, Specialist in Public Finance
IF10730
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Tax Policy and Disaster Recovery

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