Congress Offers Katrina Relief (John B. Ervin Commentary)

As a result of the massive disaster in the Gulf Coast, Congress passed the $6.1 billion Katrina Emergency Tax Relief Act that was promptly signed by President Bush on September 23. The Act is designed to encourage contributions to the Gulf’s recovery.

The Act speeds tax relief to individuals and businesses impacted by the devastation of Hurricane Katrina. It also helps give tax assistance to the many relief workers and others who have contributed through donations and other ways.

Here are some of the Act’s highlights:

• Casualty Losses — The law lifts all casualty loss restrictions for victims of Hurricane Katrina. Casualty losses that arise in the Hurricane Katrina disaster on or after Aug. 25 are not subject to the 10 percent of adjusted gross income limitation or the $100 floor.

• Extended Tax Deadlines — The Act extended the filing and payment deadline to Feb. 28, 2006, for any tax period that had not expired before August 25, 2005.

• Premature Distributions — Although premature distributions are generally discouraged, Congress relaxed some of the tough restrictions for qualified Hurricane Katrina victims. These include penalty-free withdrawals of up to $100,000 from qualified retirement plans made on or after Aug. 25, 2005, extended repayment periods qualifying for tax-free rollover treatment and adopted three-year income averaging for those who are not able to repay. In addition, the amount that can be borrowed from a qualified plan has been increased to $100,000.

• Charitable Contributions — The charitable deduction by individuals is generally limited to 50 percent of the taxpayer’s adjusted gross income. The Act removes this limitation for all qualified contributions beginning on August 28 and ending on Dec. 31, 2005, for qualified contributions that exceed the taxpayer’s giving base. The Act also exempts the qualified donations from the itemized deduction phase-out limitations. Cash contributions do not need to be specifically for Katrina relief but must be made to a qualified organization.

Individuals who open up their home free of charge to evacuees for at least 60 days may claim a special $500 deduction for each evacuee up to a maximum of $2,000.

• Mileage Reimbursement — The Act increases the standard auto mileage rate to 48.5 cents-per-mile for the Sept. 1 to Dec. 31, 2005 period. The new mileage rate for Katrina-related charity work is increased to 34 cents-per-mile from 14 cents for the same period.

• Corporate Donations — Charitable donations for corporations are limited to 10 percent of net income. The new law removes the limitation for substantiated, cash-only Katrina contributions.

• Inventories and Books — “C” corporations may claim an enhanced deduction for qualifying inventory and book contributions. The Act extends those same provisions to “S” corporations, partnerships, and sole proprietorships. Certain limitations apply.

• Other Provisions — In an effort to help Katrina-damaged businesses, Congress expanded the Work Opportunity Tax Credit by adding a new WOTC target group, Hurricane Katrina employees. A Hurricane Katrina employee is an individual whose principal place of abode was in the core disaster area on Aug. 28, 2005.

The new law also gives the IRS authority to make rules related to deadlines for filing of returns and payment of taxes for income, estate and gift, excise, and employment taxes.

All have been extended to Feb. 28, 2006 for affected victims and volunteers.

In addition, the IRS will allow employees to donate their leave time to help victims, expedite charity applications, waive certain fuel excise tax rules, and suspended some low-income housing credits.

Congress and President Bush are to be commended for their rapid response in enacting the Hurricane Katrina Emergency Relief Act.

The Act also contains other significant provisions. Taxpayer’s must contact their income tax adviser to learn how the new rules will impact their bottom line.

(John B. Ervin is a certified public accountant and president of Ervin & Co., an accounting firm in Fayetteville.)