| Summary of P.L. 109-73, Katrina Emergency Tax Relief Act of 2005
By the Tax Management Editorial Staff
Washington,
D.C.
On September 21, 2005, the House and Senate both passed the Katrina
Emergency Tax Relief Act of 2005 (P.L. 109-73). On September 23, 2005,
President Bush signed the bill, and it has been assigned Public Law
No. 109-73. The Act provides $6.11 billion in tax incentives to
victims of Hurricane Katrina. Highlights of the Act include: extension
of the work opportunity tax credit to employers who hire displaced
workers; an employee retention credit for qualifying employers which
continue to pay their employees; relaxed requirements for mortgage
revenue bonds; a credit for persons who house unrelated displaced
individuals in their home; and waiver of the 10% penalty on retirement
plan withdrawals and extension of time for payment of taxes on those
withdrawals. Under the Act, victims of Katrina will not be taxed on
indebtedness discharged by a corporate lender, casualty loss
requirements will be relaxed, and taxpayers will have five years to
replace damaged or destroyed property in the disaster area without
recognizing gain on the property. The Act also waives limits on
corporate and individual charitable cash donations through the end of
2005, and increases the mileage rate for calculating the charitable
contribution mileage deduction. Finally, the Act extends the deadlines
for filing tax returns and making payments and deposits, until
February 28, 2006, and clarifies that the extension includes
employment and excise taxes in addition to income, estate, and gift
taxes. Penalties and interest that otherwise apply are waived.
The Act defines the "Hurricane Katrina disaster area" as
the area with respect to which a major disaster has been declared by
the President before September 14, 2005, under §401 of the Robert
T. Stafford Disaster Relief and Emergency Assistance Act by reason of
Hurricane Katrina. The term "core disaster area" means that
portion of the Hurricane Katrina disaster area determined by the
President to warrant individual or individual and public assistance
from the federal government under such Act. See
www.fema.gov/news/disasters/fema for a listing of the affected
counties/parishes.
The following is a discussion of the tax-related sections of the
Act.
TITLE I--SPECIAL RULES FOR USE OF RETIREMENT FUNDS FOR RELIEF
RELATING TO HURRICANE
KATRINA
Tax-favored Withdrawals
from Retirement Plans for Relief Relating to Hurricane
Katrina
[Act §101; Related to Code
§§72(t), 401, 402, 403, 408, 457, 3405]
The Act provides that the 10% penalty on early distributions from
qualified retirement plans does not apply to qualified Hurricane
Katrina distributions of up to $100,000 from a qualified retirement
plan, a §403(b) annuity, or an IRA. The Act defines a qualified
Hurricane Katrina distribution as any distribution from an eligible
retirement plan made on or after August 25, 2005, and before January
1, 2007, to an individual whose principal place of abode on August 28,
2005, is located in the Hurricane Katrina disaster area and who has
sustained an economic loss by reason of Hurricane Katrina.
If a distribution is a qualified Hurricane Katrina distribution
without taking into account the $100,000 dollar limitation, the Act
does not treat a plan as violating any tax Code requirement merely
because the plan treats the distribution as a qualified distribution,
unless the aggregate amount of such distributions from all plans
maintained by the employer (and any member of a controlled group that
includes the employer) to that individual exceeds $100,000. Thus, the
Act does not treat a plan as violating any Code requirement merely
because an individual might receive total distributions in excess of
$100,000, taking into account distributions from plans of other
employers or IRAs.
In the case of any qualified Hurricane Katrina distribution, the
Act requires any amount required to be included in gross income for a
taxable year to be included ratably over the three-taxable year period
beginning with that taxable year unless the taxpayer elects not to
apply this provision. The Act applies rules similar to the Roth IRA
rules for contributions for which four-year averaging applies.
The Act allows any individual who receives a qualified Hurricane
Katrina distribution to make, during the three-year period beginning
on the day after the date on which the distribution was received,
contributions totaling no more than the distribution amount to an
eligible retirement plan of which such individual is a beneficiary and
to which a rollover contribution of such distribution could be made
under §402(c), §403(a)(4), §403(b)(8), §408(d)(3),
or §457(e)(16). If such a repayment contribution is made, the Act
treats the taxpayer, to the extent of the contribution amount, as
having received the qualified Hurricane Katrina distribution in a
rollover distribution, and the amount is treated as though it were
transferred to the eligible retirement plan in a direct trustee to
trustee transfer within 60 days of the distribution. Thus, the
recontribution is treated as a rollover and not includible in income.
Therefore, if a taxpayer withdrew money from a retirement plan, paid
taxes on the money over the three-year period, then recontributed the
amount, the taxpayer could file an amended return to recoup the taxes
paid.
The Act does not treat qualified Hurricane Katrina distributions as
eligible rollover distributions for purposes of the §401(a)(31)
direct transfer rules, the §402(f) written explanation provision,
and §3405 mandatory withholding rules, but considers such
distributions to meet the requirements of §§401(k)(2)(B)(i),
403(b)(7)(A)(ii), 403(b)(11), and 457(d)(1)(A) providing the events
which trigger distribution.
Effective on September 23,
2005. Recontributions of
Withdrawals for Home Purchases Cancelled Due to Hurricane
Katrina
[Act §102; Related to Code
§§401, 402, 403, 408]
The Act provides that distributions for home purchases or
construction in the Hurricane Katrina disaster area which were not
finalized because of Hurricane Katrina can be recontributed, during
the period from August 25, 2005, through February 28, 2006, to a
qualified retirement plan or IRA to which a rollover contribution of
that distribution can be made under §402(c), §403(a)(4),
§403(b)(8), or §408(d)(3). Thus, the Act does not include
that portion of the qualified distribution in income or make it
subject to the 10% early withdrawal tax. For this purpose, the Act
also specifies that, to be a qualified distribution, the distribution
must be a hardship distribution described in
§401(k)(2)(B)(i)(IV), §403(b)(7)(A)(ii) or (11)(B), or
§72(t)(2)(F), and received after February 28, 2005, and before
August 29, 2005.
The Act treats the taxpayer, to the extent of the contribution
amount, as having received the qualified Hurricane Katrina
distribution in a rollover distribution, and the amount is treated as
if it were transferred to the eligible retirement plan in a direct
trustee to trustee transfer within 60 days of the distribution.
Effective on September 23,
2005. Loans from Qualified Plans
for Relief Relating to Hurricane Katrina
[Act §103; Related to Code
§72(p)]
The Act increases the limitations on the amount excluded from
income for loans from qualified employer plans under Code §72(p)
for "qualified individuals" from the lesser of (1) $50,000
or 50% of the individual's account balance to (2) $100,000 or 100% of
the individual's account balance. Further, under the Act, if a
qualified individual has an outstanding loan on or after August 25,
2005, from a qualified employer plan (as defined in Code
§72(p)(4)), then: (1) the due date for any repayment during the
period beginning on August 25, 2005, and ending on December 31, 2006,
is delayed for one year, and any subsequent repayments are
appropriately adjusted to reflect this delay in the due date and any
interest accruing during such delay; and (2) the one-year period
during which required repayment is delayed is disregarded in complying
with the requirements under §72(p)(2)(B) or (C) that the loan be
repaid within five years and that level amortization payments be made.
For these purposes, the Act defines a "qualified individual"
as one whose principal place of abode on August 28, 2005, is located
in the Hurricane Katrina disaster area and who has sustained an
economic loss by reason of Hurricane Katrina.
Effective on September 23,
2005. Provisions Relating to
Plan Amendments
[Act §104; Related to Code
§401]
The Act permits certain plan amendments made pursuant to the
changes made by the provisions of Title I of the Act, or regulations
issued thereunder, to be retroactively effective. If the plan
amendment meets the requirements of this provision of the Act, then
the plan is treated as being operated in accordance with its terms. In
order for this treatment under the Act to apply, the plan amendment is
required to be made on or before the last day of the first plan year
beginning on or after January 1, 2007, or such later date as provided
by the Secretary of the Treasury; governmental plans are given an
additional two years in which to make required plan amendments. Under
the provision, if the amendment is required to be made to retain
qualified status as a result of the changes made by Title I of the Act
(or regulations), the amendment is required to be made retroactively
effective as of the date on which the change became effective with
respect to the plan, and the plan is required to be operated in
compliance until the amendment is made. Under the provision,
amendments that are not required to retain qualified status but that
are made pursuant to the changes made by Title I of the Act (or
regulations) can be made retroactively effective as of the first day
the plan is operated in accordance with the amendment. A plan
amendment is not considered to be pursuant to changes made by Title I
of the Act (or regulations) if it has an effective date before the
effective date of the provision under the Act (or regulations) to
which it relates.
Effective on September 23, 2005.
TITLE II--EMPLOYMENT
RELIEF Work Opportunity Tax
Credit for Hurricane Katrina Employees
[Act §201; Related to Code
§51]
The Act treats a Hurricane Katrina employee as a member of a
targeted group for purposes of the §51 work opportunity credit. A
"Hurricane Katrina employee" is any individual who on August
28, 2005, had a principal place of abode in the core disaster area and
who is hired during the two-year period beginning on that date for a
position the principal place of employment of which is located in the
core disaster area, and any individual who on such date had a
principal place of abode in the core disaster area, who is displaced
from such abode by reason of Hurricane Katrina, and who is hired
during the period beginning on such date and ending on December 31,
2005.
Instead of the §51(d)(12) certification requirement, an
individual is allowed to provide the employer with reasonable evidence
that the individual is a Hurricane Katrina employee. The Act also
provides that the §51(c)(4) current December 31, 2005 termination
provision is not applicable to the Hurricane Katrina Work Opportunity
Credit and also that the nonqualifying rehires provision does not
apply to the first hire of such an employee as a Hurricane Katrina
employee, unless such employee was an employee of the employer on
August 28, 2005. Employee
Retention Credit for Employees Affected by Hurricane
Katrina
[Act §202; Related to Code
§§38, 51, 52, 280C]
The Act allows an eligible employer a credit of an amount equal to
40% of the qualified wages of each eligible employee, not to exceed
$6,000 for the taxable year. The Act defines an "eligible
employer" as any employer which conducted an active trade or
business on August 28, 2005, in a core disaster area, and which is
inoperable on any day after August 28, 2005, and before January 1,
2006, as a result of damage sustained by Hurricane Katrina. An
"eligible employee" is defined by the Act as with respect to
an eligible employer an employee whose principal place of employment
on August 28, 2005, with such eligible employment was in a core
disaster area.
The Act defines "qualified wages" as wages paid or
incurred by an eligible employer with respect to an eligible employee
on any day after August 28, 2005, and before January 1, 2006, which
occurs during the period beginning on the date on which the
above-described trade or business first became inoperable at the
principal place of employment of the employee immediately before
Hurricane Katrina. The Act specifies the ending date as the date on
which the trade or business has resumed significant operations at such
principal place of employment.
The Act provides that "wages" includes wages paid without
regard to whether the employee performs no services, performs services
at a different place of employment than that of the principal place of
employment, or performs services at such principal place of employment
before significant operations have resumed. However, the Act does not
allow large businesses (defined as any trade or business for any
taxable year if such trade or business employed an average of more
than 200 employees on business days during the taxable year) to
qualify for the employee retention credit.
The Act also provides that an employee is not be treated as an
eligible employee for any period with respect to any employer if that
employer is allowed a credit under §51 for that employee for such
period. Finally, the Act provides that the employee retention credit
for employees affected by Hurricane Katrina be added to the current
year §38(b) general business credit.
TITLE III--CHARITABLE GIVING
INCENTIVES Temporary Suspension
of Limitations on Charitable Contributions
[Act §301; Related to Code
§170(b), (d)]
The Act suspends, for charitable contributions made by individuals
between August 28, 2005, and December 31, 2005, the percentage limitations of §170(b) and the carryover
limitations of §170(d). This relief is limited to contributions
made to charities that are not private foundations, other than
§509(a)(3) supporting organizations, and must be elected by the
taxpayer.
Similar relief is provided for corporate contributions, although limited to contributions for relief efforts related to Hurricane Katrina. If a qualifying contribution is made by an S corporation or
partnership, the election is made at the shareholder or partner
level. Additional Exemption for
Housing Katrina Displaced Individuals
[Act §302; Related to Code
§63]
The Act allows individuals a $500 deduction against taxable income
for each "Hurricane Katrina displaced individual" that the
taxpayer houses for free in the taxpayer's principal residence for a
period of at least 60 consecutive days that ends in the taxable year.
The deduction is available only in 2005 and 2006, may be taken only
once for any single displaced individual, and may not be taken for the
taxpayer's spouse or dependent. In addition, the taxpayer's aggregate
deductions under this provision cannot exceed $2,000 over the two-year
period. No deduction is allowed if the taxpayer accepts rent or other
amount in connection with providing such
housing. Increase in Standard
Mileage Rate for Charitable Use of Vehicles
[Act §303; Code §170(i);
Related to Code §162]
Under the Act, the 14 cent standard mileage rate for charitable use
of an automobile is increased to 70% of the standard mileage rate for
business purposes, rounded to the next highest cent. To qualify for
this increased deduction, the vehicle has to be used for
Katrina-related relief efforts during the period beginning on August
25, 2005, and ending on December 31,
2006. Mileage Reimbursements to
Charitable Volunteers Excluded from Gross Income
[Act §304; Related to Code
§§61, 162, 170, 274]
The Act excludes from the income of Katrina volunteers the amount
of any reimbursement received from a §170(c) organization for use
of an automobile. To qualify for this exclusion, the use of the
automobile must relate to Katrina relief provided during the period
beginning on August 25, 2005, and ending on December 31, 2006, and the
organization must comply with the provisions of §274(d) as if the
volunteer were an
employee. Charitable Deduction
for Contributions of Food Inventory
[Act §305; Code
§170(e)(3)(C) (new)]
The Act amends Code §170(e)(3) by redesignating subparagraph
(C) as (D) and adding new subparagraph (C) with a rule for
contributions of food inventory. Such contributions, which are not
limited to C corporations, are not subject to the usual §170(e)
limitations on contributions of ordinary income property. To qualify
for the enhanced deduction, the donated food must be apparently
wholesome and the contribution must be made between August 28, 2005,
and December 31, 2005. In the case of a taxpayer other than a C
corporation, the deduction is limited to 10% of the taxpayer's
aggregate net income for the taxable year from all trades or
businesses from which the contributions were made, computed without
regard to the
contributions. Charitable
Deduction for Contributions of Book Inventories to Public
Schools
[Act §306; Code
§170(e)(3)(D) (new)]
The Act amends Code §170(e)(3) by redesignating subparagraph
(D), as redesignated under Act §305, as (E) and adding new
subparagraph (D) with a rule for contributions of book inventory to
public schools. Such contributions, which are limited to C
corporations, are not subject to the usual §170(e) deduction
limitations on contributions of ordinary income property. To qualify,
the contribution has to be made to a school at the elementary or high
school level, and the school has to certify that the books are
suitable for use in its educational program and that the books will be
so used.
The enhanced deduction is available for contributions made on or
after August 28, 2005, and before January 1, 2006.
TITLE IV--ADDITIONAL TAX RELIEF
PROVISIONS Exclusion of
Cancellation of Indebtedness Income
[Act §401; Related to Code
§§61, 108]
The Act allows individuals to exclude from gross income discharge
of indebtedness income when such indebtedness is discharged in
response to damage suffered from Hurricane Katrina. The exclusion does
not apply to business debt or to a discharge where the property
securing the debt is located outside of the Hurricane Katrina disaster
area. The exclusion applies to discharges made on or after August 25,
2005, and before January 1,
2007. Suspension of Certain
Limitations on Personal Casualty Losses
[Act 402; Related to Code
§165]
The Act provides that §165(h)(1) ($100 limitation per
casualty) and (2)(A) (casualty loss allowed only to the extent it
exceeds 10% of adjusted gross income) will not apply to losses
described in §165(c)(3) (personal casualty losses) which arise in
the Hurricane Katrina disaster area on or after August 25, 2005, and
which are attributable to Hurricane
Katrina. Extension of
§7508A Relief Relating to Hurricane Katrina
[Act §403; Code
§7508A]
The Act extends the time period for filing returns, paying taxes,
and making tax deposits for taxpayers affected by Hurricane Katrina
until February 28, 2006 (rather than January 3, 2006, as previously
announced by the IRS); clarifies that such extension includes
employment and excise taxes in addition to income, estate and gift
taxes; and waives penalties and interest that otherwise apply. The
extension applies for any period for performing an act which has not
expired before August 25,
2005. Special Rules for Mortgage
Revenue Bonds
[Act §404; Related to Code
§143]
The Act provides that in the case of financing provided with
respect to a qualified Hurricane Katrina recovery residence,
§143(d) (first-time homeowner requirement) is applied as if such
residence were a targeted area residence.
A qualified Hurricane Katrina recovery residence is: any residence
in the core disaster area, and any other residence if such other
residence is located in the same state as the principal residence, and
the mortgagor with respect to such other residence owned a principal
residence on August 28, 2005, which was located in the Hurricane
Katrina disaster area, and was rendered uninhabitable by reason of
Hurricane Katrina.
The Act also provides that in the case of any loan with respect to
a residence in the Hurricane Katrina disaster area, §143(k)(4)
(limiting the amount of a qualified home-improvement loan) will be
applied by substituting $150,000 for $15,000 to the extent such loan
is for the repair of damage by reason of Hurricane Katrina. These
rules do not apply to financing provided after December 31,
2007. Extension of Replacement
Period for Nonrecognition of Gain for Property Located in Hurricane
Katrina Disaster Area.
[Act §405; Related to Code
§1033]
The Act provides taxpayers with a five-year replacement period
under §1033(a)(2)(B)(i) with respect to property in the Hurricane
Katrina disaster area which is compulsorily or involuntarily converted
on or after August 25, 2005, by reason of Hurricane Katrina, but only
if substantially all of the use of the replacement property is in the
Hurricane Katrina disaster area. The Act applies to both personal
residences and business
property. Special Rule for
Determining Earned Income
[Act §406; Related to Code
§§24, 32, 6213]
The Act allows a "qualified individual" whose §32(c)
earned income for the taxable year including August 25, 2005, is less
than the individual's earned income for the preceding taxable year to
elect to determine the §24(d) additional larger family credit and
the §32 earned income credit by substituting the individual's
earned income for the preceding taxable year for the individual's
earned income for the taxable year that includes August 25, 2005. A
"qualified individual" for this purpose is any individual
whose principal place of abode on August 25, 2005, was located in the
"core disaster area" or in the "Hurricane Katrina
disaster area" outside the core disaster area, if the individual
was displaced from his or her principal place of abode by reason of
Hurricane Katrina. The special rule applies to spouses filing a joint
return for a taxable year including August 25, 2005, if either spouse
is a "qualified individual"; the earned income in that case
is the sum of the spouses' earned incomes for the preceding taxable
year. An election applies to both the §24(d) and the §32
credits. For purposes of §6213 (assessment and deficiency), an
incorrect use of earned income in an election on a return is treated
as a mathematical or clerical
error. Secretarial Authority to
Make Adjustments Regarding Taxpayer and Dependency Status
[Act §407; Related to Code
§§2, 152]
The Act grants the Treasury Secretary (or the Secretary's delegate)
the authority to adjust the application of the internal revenue laws
to ensure that taxpayers do not lose any deduction or credit, or
experience a change in filing status, by reason of temporary
relocations as a result of Hurricane Katrina. Any such adjustment,
however, has to ensure that an individual is not taken into account by
more than one taxpayer with respect to the same tax benefit.
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