Hurricane Sandy has been designated a qualified disaster for federal tax purposes. How does this affect tax planning for victims, donors, employees and charities?
Victims of Hurricane Sandy are getting some relief from the Internal Revenue Service, which has designated the storm a qualified disaster for federal tax purposes in keeping with the National Disaster Relief Act of 2008. The IRS has also passed a flurry of new rules that could impact tax planning for consumers, employers and organizations who want to help.
New IRS rules impacting tax planning for consumers, employers and charities include:
· Leave-based donations: Employees may donate vacation, sick or personal leave through a program announced last week by the IRS and Treasury Department. Employers will exchange the leave for cash donated to qualified, tax-exempt organizations helping hurricane victims. The donations can be made through December 31, 2013, and will not be included in the income or wages of the employees. In turn, employers will be permitted to deduct the amount of the cash payment. Donated leave provides an additional tax planning strategy for workers seeking deductions.
· Exemptions for donations made to individuals: Employers who help employees recover from the wreckage of Hurricane Sand can exclude the donation from the employees’ taxable income. The exemption applies to qualified disaster relief payments, such as living expenses or home repairs not covered by insurance. Employer-sponsored private foundations may also provide disaster relief to employees affect by the hurricane without affecting their tax-exempt status, though the foundations much follow federal guidelines for disaster relief through charitable organizations.
· Streamlined Review: The IRS is expediting the approval process for groups seeking tax-exempt status to help hurricane victims.
The relief act affords victims of Hurricane Sandy a number of tax benefits. They include:
· Extension of net operating loss carryback: Taxpayers can carry back a qualified disaster loss for five years. In general, such losses can be carried back two years.
· Special depreciation allowances: Affected business owners can deduct a “bonus” depreciation of 50 percent to qualifying property.
Hurricane Sandy is inspiring more than giving. The disaster is also creating opportunities for scam artists who impersonate charities to defraud well-intentioned consumers of their money or personal information, the IRS warns. Fraudsters may contact victims through phone calls, social media outreach, email or in-person solicitations. The IRS urges consumers to be wary of charities with names that sound or look similar to nationally known charities. The agency recommends against revealing personal financial information, such as Social Security or account numbers, to solicitors, or giving donations in the form of cash. A donation by check or credit card provides documentation helpful in tax planning and filing.