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Thomson Reuters Checkpoint Special Study: Disaster relief provisions in the Bipartisan Budget Act of 2018

On February 9, Congress passed, and the President signed into law, H.R. 1892, the “Bipartisan Budget Act of 2018” (the Budget Act, P.L. 115-123). In addition to providing a continuing resolution to fund the federal government through March 23, this 2-year budget contains a host of tax law changes. The Act retroactively extends through 2017 over 30 so-called “extender” provisions, provides a number of miscellaneous tax-related provisions, and includes tax relief to victims of the California wildfires and Hurricanes Harvey, Irma, and Maria.

For extender provisions included in the “Bipartisan Budget Act of 2018,” see ¶ 24.

For other non-extender tax-related provisions included in the “Bipartisan Budget Act of 2018,” see ¶ 9.

Relief from early withdrawal tax for California wildfire distribution. A distribution from a qualified retirement plan, a tax-sheltered annuity plan, an eligible deferred compensation plan of a State or local government employer, or an individual retirement arrangement (IRA) generally is included in income for the year distributed. In addition, unless an exception applies, a distribution received before age 59½ is subject to a 10% additional tax under Code Sec. 72(t) (the “early withdrawal tax”) on the amount includible in income. In general, a distribution from an eligible retirement plan may be rolled over to another eligible retirement plan within 60 days, in which case the amount rolled over generally is not includible in income. The 60-day requirement can be waived by IRS in certain situations.

The Budget Act provides an exception to the retirement plan 10% early withdrawal tax for up to $100,000 of qualified wildfire distributions. (Budget Act Sec. 20102(a)) These distributions are defined as any distribution from an eligible retirement plan made on or after Oct. 8, 2017, and before Jan. 1, 2019, to an individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, is located in the California wildfire disaster area and who has sustained an economic loss by reason of the wildfires to which the declaration of such area relates. (Budget Act Sec. 20102(a)(4)(A)) The “California wildfire disaster area” means an area with respect to which, between Jan. 1, 2017 through Jan. 18, 2018, a major disaster has been declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of wildfires in California. (Budget Act Sec. 20101)

The amount of a qualified wildfire distribution can be repaid (recontributed) to an eligible retirement plan within three years. (Budget Act Sec. 20102(a)(3)(A)) A taxpayer will be treated as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution—i.e., eliminating the tax consequence of an income distribution. (Budget Act Sec. 20102(a)(3))

Unless a taxpayer elects otherwise, any amount attributable to a qualified wildfire distribution required to be included in gross income for such tax year will be included in income ratably over three years, (Budget Act Sec. 20102(a)(5)(A))

Relief for cancelled home purchases. The Budget Act also allows for the recontribution of certain retirement plan withdrawals for home purchases or construction in the California wildfire disaster area, which were received after Mar. 31, 2017, and before Jan. 15, 2018, where the home purchase or construction was cancelled on account of the California wildfire disaster. A timely recontribution avoids tax on the plan withdrawal. The recontribution must be made during the period beginning on Oct. 8, 2017, and ending on June 30, 2018. (Budget Act Sec. 20102(b))

Eased rules for retirement plan loans. With respect to retirement plan loans to a “qualified individual” (see below) made during the period beginning on Feb. 9, 2018 (the date of the enactment) and ending on Dec. 31, 2018 , the Budget Act:

…increases the maximum amount that a participant or beneficiary can borrow from a qualified employer plan under Code Sec. 72(p)(2)(A), from $50,000 to $100,000;
…removes the “one half of present value” of nonforfeitable accrued benefit plan loan limitation; and
…allows for a longer repayment term in the case of a qualified individual with an outstanding loan on or after Oct. 8, 2017. (Budget Act Sec. 20102(c))

A “qualified individual” means any individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, is located in the California wildfire disaster area and who has sustained an economic loss by reason of wildfires to which the declaration of such area relates. (Budget Act Sec. 20102(c)(3))

California wildfires employee retention credit. The Budget Act provides a new “employee retention credit” to “eligible employers” in an amount equal to 40% of up to $6,000 of the qualified wages with respect to each “eligible employee” of such employer for such tax year. (Budget Act Sec. 20103(a))

RIA observation: Thus, the maximum credit per employee is $2,400 ($6,000 × 40%).
RIA illustration: Employer X is an eligible employer in the “California wildfire disaster zone” (see below). X has two eligible employees, A and B, to whom X pays qualified wages of $4,000 and $7,000 respectively. X is entitled to a total credit of $4,000; $1,600 for the wages paid to A ($4,000 × 40%) and $2,400 for $6,000 of the wages paid to B ($6,000 × 40%).

An eligible employers is any employer (a) which conducted an active trade or business on Oct. 8, 2017, in the California wildfire disaster zone, and (b) with respect to whom the trade or business described in subparagraph (a) is inoperable on any day after Oct. 8, 2017, and before Jan. 1, 2018, as a result of damage sustained by reason of the wildfires to which such declaration of such area relates. In general, the credit is be treated as a credit listed in Code Sec. 38. (Budget Act Sec. 20103(b)(1))

The term “California wildfire disaster zone” means that portion of the California wildfire disaster area determined by the President to warrant individual or individual and public assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of wildfires in California. (Budget Act Sec. 20101)

An “eligible employee” is one whose principal place of employment on Oct. 8, 2017, with such eligible employer was in the California wildfire disaster zone. (Budget Act Sec. 20103(b)(2))

“Qualified wages” means wages paid or incurred by an eligible employer with respect to an eligible employee on any day after Oct. 8, 2017, and before Jan. 1, 2018, which occurs during the period (a) beginning on the date on which the trade or business first became inoperable at the principal place of employment of the employee immediately before the wildfires to which the declaration of the California wildfire disaster area relates, and (b) ending on the date on which such trade or business has resumed significant operations at such principal place of employment. Qualified wages include wages paid without regard to whether the employee performs no services, performs services at a different place of employment than such principal place of employment, or performs services at such principal place of employment before significant operations have resumed. (Budget Act Sec. 20103(b)(3))

Charitable deduction limitations suspended. Generally, an individual who itemizes can deduct charitable contributions up to 50%, 30% or 20% of AGI, depending on the type of property contributed and the type of donee. (Code Sec. 170(b)(1)) A corporation generally can deduct charitable contributions up to 10% of its taxable income. (Code Sec. 170(b)(2)) Amounts that exceed the ceilings (“excess contributions”) can be carried forward for five years by both individuals and corporations, subject to various limitations and ordering rules. (Code Sec. 170(d)) For individuals, charitable contributions are deductible only as an itemized deduction. (Reg. § 1.170A-1(a))

For qualifying charitable contributions, the Budget Act: (Budget Act Sec. 20104(a))

…temporarily suspends the majority of the limitations on charitable contributions in Code Sec. 170(b);
…provides that such contributions will not be taken into account for purposes of applying Code Sec. 170(b) and Code Sec. 170(d) to other contributions;
…provides eased rules governing the treatment of excess contributions; and
…provides an exception from the overall limitation on itemized deductions for certain qualified contributions.

“Qualified contributions” means any charitable contribution if:

i. such contribution (I) is paid during the period beginning on Oct. 8, 2017, and ending on Dec. 31, 2018, in cash to an organization described in Code Sec. 170(b)(1)(A), and (II) is made for relief efforts in the California wildfire disaster area,
ii. the taxpayer obtains from such organization contemporaneous written acknowledgment that such contribution was used (or is to be used) for relief efforts described in clause (i)(II) (see above), and
iii. the taxpayer has elected the application of this subsection with respect to such contribution. (Budget Act Sec. 20104(a)(4)(A))

For partnerships and S corporations, the election is made separately by each partner or shareholder. (Budget Act Sec. 20104(a)(4)(C))

Qualified disaster-related personal casualty losses. If an individual has a net disaster loss for any tax year: (Budget Act Sec. 20104(b))

A. the amount determined under Code Sec. 165(h)(2)(A)(ii) (i.e., so much of such excess as exceeds 10% of the individual’s gross income) will be equal to the sum of (i) such net disaster loss, and (ii) so much of the excess referred to in the matter preceding clause (i) of Code Sec. 165(h)(2)(A), reduced by the amount in (i) (above) as exceeds 10% of the individual’s adjusted gross income. For this purpose, “net disaster loss” means the excess of qualified disaster-related personal casualty losses over personal casualty gains, and “qualified disaster-related personal casualty losses” means losses described in Code Sec. 165(c)(3) which arise in the California wildfire disaster area on or after Oct. 8, 2017, and which are attributable to the wildfires to which the declaration of such area relates.
B. he threshold limitation in Code Sec. 165(h)(1) is $500 rather than “$500 ($100 for taxable years beginning after December 31, 2009)”;
C. the standard deduction under Code Sec. 63(c) is increased by the net disaster loss, and
D. the AMT adjustment for the standard deduction underCode Sec. 56(b)(1)(E) will not apply to so much of the standard deduction as is attributable to the increase under (C) (above)of this paragraph.

Special rule for earned income. The Budget Act provides that, in the case of a “qualified individual,” if the earned income of the taxpayer for the tax year which includes any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, is less than the earned income of the taxpayer for the preceding tax year, the credits allowed under Code Sec. 24(d) (child tax credit) and Code Sec. 32 (earned income tax credit) may, at the taxpayer’s election be determined by substituting (a) the earned income for the preceding tax year, for (b) the earned income for the tax year which includes any portion of the period from Oct. 8, 2017, to Dec. 31, 2017. A “qualified individual” means any individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, was located (a) in the California wildfire disaster zone, or (b) in the California wildfire disaster area (but outside the California wildfire disaster zone) and such individual was displaced from such principal place of abode by reason of the wildfires to which the declaration of such area relates. (Budget Act Sec. 20104(c))

Modified definition—Hurricanes Harvey and Irma disaster areas. The Budget Act modifies the definition of the Hurricanes Harvey and Irma disaster areas for purposes of the relief provided in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (P.L. 115–63) . The Hurricane Harvey disaster area is expanded to means an area with respect to which a major disaster has been declared by the President before Oct. 17, 2017 (rather than as previously, before Sept. 21, 2017), under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Harvey. Similarly, the term “Hurricane Irma disaster area”is expanded to means an area with respect to which a major disaster has been declared by the President before Oct. 17, 2017 (rather than as previously, before Sept. 21, 2017), under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Irma. (Budget Act Sec. 20201(a))

Employee retention credit for Hurricanes Harvey, Irma, And Maria. For purposes of the employee retention credit with regard to Hurricanes Harvey, Irma, And Maria, rules similar to Code Sec. 51(i)(1) (which disallows the work opportunity tax credit (WOTC), when the employee is considered “related” to the employer) and Code Sec. 52 (which provides rules for apportioning the WOTC among commonly controlled businesses) apply. The Budget Act provides that rules similar to Code Sec. 280C(a) also apply to the retention credit. Code Sec. 280C(a) provides that no deduction is allowed for that portion of wages or salaries paid or incurred for a tax year which is equal to the sum of the credits determined for the tax year under: Code Sec. 45A(a) (the Indian employment credit); Code Sec. 45P(a) (the employer wage credit for employees who are active duty members of the uniformed services); Code Sec. 45P(a) (the credit for paid family and medical leave); Code Sec. 51(a) (the work opportunity credit); Code Sec. 1396(a) (the empowerment zone employment credit); Code Sec. 1400P(b) (the employer credit for housing employees affected by Hurricane Katrina;) and Code Sec. 1400R (the employee retention credit for employers affected by Hurricane Katrina). (Budget Act Sec. 20201(b))

H.R. 1892, the “Bipartisan Budget Act of 2018.”

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