Small Business Taxes & Management--Copyright 2005, A/N Group, Inc.

Introduction

On September 12, 2005 the Senate Finance Committee introduced bipartisan legislation providing tax relief for victims of Hurricane Katrina. Senators Grassley and Baucus indicated that this package is to provide immediate relief. They expect more long-term tax incentives to be the focus of later legislation.

As of September 16, 2005 the House and Senate have reconciled their respective versions. The reconciled version is appended to the Senate version below.

Cash Flow

Discharge of Indebtedness Related to Katrina. Gross income generally includes any amount realized from the discharge of indebtedness. The proposal would provide an exemption for indebtedness discharged by commercial lenders when the forgiveness is in response to damage suffered from Hurricane Katrina.

Early Withdrawals from Retirement Plans. The proposal would waive the 10% penalty tax for premature distributions from IRAs and qualified retirement plans (including 401(k) and 403(b) plans) for individuals whose principal residence is in a federally declared natural disaster area. Individuals eligible for this waiver because of Katrina would be permitted to pay income tax on such distributions ratably over a 3-year period. Rollover treatment would be allowed on amounts re-contributed over the 3-year period following the distribution date. Limitations on loans would be increased for Hurricane Katrina victims to the lesser of $100,000 or 100% of the individual's account balance. Payments due on qualified plan loans after August 29, 2005 and before August 30, 2006 could be deferred.

Change--Limited to Hurricane Katrina with an expanded definition of the disaster area.

Employment

Extension of WOTC to Katrina Victims. The proposal adds an additional category of eligible new workers under the WOTC credit for Hurricane Katrina survivors, provided the worker lived within the disaster zone and became unemployed as a result of damage or destruction to his or her workplace. Employers inside the disaster area may hire qualifying employees from the disaster area for three years. A change of employer is required.

Katrina Disaster Employee Retention Credit. The proposal would provide a 40% tax credit for wages paid up to $6,000 if paid after August 28, 2005 and before December 31, 2005, by employers located in the disaster zone. Wages paid to relatives would be ineligible for the credit.

Housing

Incentive for Housing Aid. The Act would provide taxpayers who house dislocated persons from Hurricane Katrina for a minimum of sixty days in their principal residences an additional personal exemption of $500 per dislocated person (maximum $2,000 deduction).

Modified to extend relief to 2005 and 2006.

Relax Restrictions on Mortgage Revenue Bonds. The proposal would provide greater access to mortgage revenue bond proceeds by lifting the first-time homeowner requirement and relaxing the purchase price and income limitations for homes in the area damaged by Katrina for the three years following the disaster.

Charitable Giving--Taxpayer Assistance and Protection

Encourage Food Donations by Businesses. The proposal provides an enhanced deduction for donations of food inventory for businesses through December 31, 2005. The proposal would allow all taxpayers to claim an enhanced deduction for donations of food inventory equal to the lesser of fair market value or twice basis.

Encourage Book Donations by Businesses. The proposal provides an enhanced deduction for donations of book inventory through December 31, 2005. The deduction for donations of book inventory would be limited to the lesser of fair market value or twice basis.

IRA Charitable Rollover. The provision would exclude from gross income otherwise taxable IRA withdrawals from a traditional or a Roth IRA for qualified charitable distributions. Taxpayers 70-1/2 and older would be allowed to roll over amounts to a qualified charitable organization on a tax-free basis. Taxpayers aged 59-1/2 and older would be allowed to transfer IRA funds to a charitable remainder trust.

This provision was dropped.

Corporate Charitable Contributions. The proposal would temporarily increase the percentage limitation for regular (C) corporations from 10% to 15% for one taxable year ending on or before December 31, 2006.

Allows charitable contribution to 100% of taxable income.

Individual Income Limits for Cash Contributions. The proposal raises the permitted cash contribution level for individuals from 50% to 60% of AGI for tax years ending on or before December 31, 2005.

Modified to increase cash contribution level for individuals form 50% to 100% of AGI for new cash contributions for tax years ending on or before December 31, 2005. The overall limitation on itemized deductions is waived.

Increased Mileage Rate for Calculating Charitable Contribution Mileage Deduction. The proposal sets the charitable mileage rate at 50% of the standard business mileage rate determined periodically by the IRS.

Under reconciled version mileage rate set at 70% of the standard business mileage. Taxpayer must substantiate that expenses are incurred in providing relief to Hurricane Katrina.

Casualty Loss Provision. Under current law, non-business casualty losses are deductible only by taxpayers who itemize and only to the extent they exceed 10% of the taxpayer's AGI and a $100 floor. The proposal eliminates the 10% floor for casualty losses incurred in the Hurricane Katrina disaster area, including those claimed on amended returns.

Modified to remove $100 floor.

Section 1033(h) Involuntary Conversions. Present law allows taxpayers to avoid recognition on gain with respect to homes that are damaged or destroyed as a result of a presidentially declared disaster if the property is replaced within a 4-year period. Business property must be replaced within a 2-year period. The proposal extends the replacement period to five years for property that was damaged or destroyed within the presidentially declared disaster area for Katrina.

IRS Administrative Relief. The Code allows the IRS to extend deadlines for filing returns and making payments in the case of income, estate and gift taxes. The proposal extends the deadlines until February 28, 2006 (the Service had extended them to January 3, 2006) and clarifies that the extension includes employment and excise taxes.

--Last Update 09/16/05