Helping in gulf coast relief can produce tax benefits wherever you live

By Jonathan Hitter, CPA, Walter & Shuffain, Norwood, Mass.

As the United States prepares to confront another hurricane season, the nation still has a long way to go in rebuilding Gulf Coast communities and lives devastated by Hurricane Katrina last year. While federal funds are pouring into Louisiana and Mississippi, Congress has taken steps to encourage individuals and corporations to contribute to the relief effort as well.

The Katrina Emergency Tax Relief Act of 2005 offers unprecedented tax breaks not only for residents and businesses affected by the storm and ensuing floods, but also for those helping in the recovery. Normal limits on charitable deductions for donations of cash, housing, food, clothing, books and other items have been removed or significantly relaxed for those assisting in the Katrina relief effort.

Charitable deduction limits

One of the most significant provisions of the act affects contributions to any charity. Normally the deduction for contributions to charitable organizations is limited to 50 percent of the taxpayer’s adjusted gross income (AGI) for the year. The new law, however, removes that limitation for donations made to any charitable organization — not just for Katrina relief — between Aug. 28 and Dec. 31, 2005. This provision allows higher-income individuals, who are subject to a phase-out of charitable deductions, to contribute to Katrina relief among their donations and receive a full charitable deduction.

Deductions for providing housing

In addition, people do not need to reside in or be working in the relief area to benefit from the new law. Individuals anywhere in the country who use their principal residence to provide housing at no charge to evacuees from Katrina-damaged areas for at least 60 consecutive days generally qualify for new deductions under the relief act. They may claim a $500 deduction from taxable income for each evacuee residing in their home, up to a maximum of $2,000 (i.e., four evacuees).

The home must be the individual’s principal residence — not a vacation house, for example — and the deduction does not apply to a spouse or a dependent of the individual, (e.g., children), who return from the affected area to their homes. It may be claimed, however, for such other family members as siblings, cousins, aunts, uncles, nephews and nieces from the storm-damaged coast. In addition, individuals may be eligible for a charitable deduction for the rental value of the home and the food purchased for the guest if they are providing housing under the auspices of a charitable organization (e.g., United Way) that is placing people in homes.

Mileage deductions

Mileage related to Katrina relief efforts can be deducted at a rate higher than the normal 14 cents a mile usually allowed for charitable work. The new act provides for mileage deductions at 70 percent of the rate for business travel when assisting in Katrina relief. The current standard business mileage rate is 48.5 cents a mile, resulting in a rate for Hurricane Katrina charitable work of 34 cents a mile (20 cents a mile more than previous rules would have permitted).

To claim this deduction, the individual must have reliable records substantiating the miles driven, the dates of the trips, the name of the organization served, the locations where charitable services were provided and the nature of those services. The work must be related to Hurricane Katrina relief to claim the higher mileage rate. Taxpayers should remember that parking and tolls for charitable work, not just mileage, also are deductible.

Corporate charitable deductions

Corporations benefit from the latest tax provisions as well. Previously, corporate charitable deductions were limited to 10 percent of taxable income for the year in which the contribution was made. The new law waives that 10 percent limitation for Hurricane Katrina cash donations (such as matching funds or large contributions) that are made to a charitable organization. In this instance, for corporations to qualify, their contributions must be specifically for Katrina relief, so the eligibility for deduction is based more on the destination of the dollars contributed than on the nature of the organization receiving the funds. The corporation itself is responsible for substantiating that the funds were used for Katrina relief.

Other rules apply to corporate donations of food or books to charitable organizations or schools in the disaster area made between Aug. 28 and Dec. 31, 2005. Under normal circumstances, "C" corporations were entitled to deduct one-and-a-half times the basis value of donated food and books. "S" corporations, partnerships and sole proprietorships could deduct only the actual basis value, with no multiplier. Under the Katrina Emergency Tax Relief Act, corporations now may deduct the lesser of the cost of the donation plus half the excess market value or two times the basis cost. So, for example, if a company spent $100 on food or books that would sell for $500, it could deduct the lesser of two times the basis ($100 x 2 = $200) or the basis cost plus half the excess fair market value ($100 + 0.5 x $400 = $300). In this example, the deduction would be $200, the lesser amount.

Donated food must be fit for human consumption, so the rules do not allow deductions for expired or spoiled food. Books qualify if they are given to any public or private school that provides elementary or secondary-school education and that normally maintains a regular faculty and curriculum. The company donating the books must obtain certification in writing from the school that the books are suitable to be used in educational programs and that the school indeed will use the books. The corporation may donate books it already has in its possession or may buy books from a store or publisher to donate.

Deductions for employing relief workers

Those who employ workers in the Katrina disaster zone are subject to a new provision that has been incorporated into the existing Work Opportunity Tax Credit, which encourages the hiring of economically challenged individuals. Congress has created a new target group within this tax-credit law for employees working on Katrina relief. The employer is eligible to deduct 40 percent of the first $6,000 in wages for each employee hired to work in the core disaster area through August 2007. Elsewhere across the United States, employers can take the same tax credit for displaced individuals whose principal residence was in the disaster area and who were hired before Dec. 31, 2005.

Additional Katrina Emergency Tax Relief Act benefits

For those who suffered casualty losses from Hurricane Katrina, a whole new category of casualty losses has essentially been created. Normally, individuals could deduct up to only 10 percent of their AGI, and losses would have had to total at least $100 to qualify. For Hurricane Katrina victims, however, no restrictions apply. They can deduct 100 percent of their Katrina-caused losses, assuming the individual itemizes.

Savings become more readily available to Katrina victims under the new act. Those who had their principal home in the affected region and sustained an economic loss may withdraw up to $100,000 from an IRA or 401(k) account without paying the usual early-withdrawal penalty. The funds still will be taxed, but payment of income taxes on the distributed amount may be spread over three years (or paid all in the same year).

These items are among the many new tax-relief provisions of the Katrina Emergency Tax Relief Act of 2005 from which every caring individual and corporation in America may benefit. Please contact your tax adviser for additional information.

About the author

Jonathan Hitter is a CPA with the accounting firm of Walter & Shuffain, PC in Norwood, MA. He holds a Masters degree in Taxation from Northeastern University and a Bachelors degree in Accounting from Syracuse University.

Note: The following information is provided to you by third parties for informational purposes only and shall not constitute tax or legal advice. Microsoft Corp. has not checked or verified any of the information provided and makes no representations or warranties as to its accuracy. Each individual’s tax situation is unique, and you should check with your accountant or other tax professional for particular advice on your situation.