Tax Policy and Disaster Recovery

Updated September 11, 2018

Tax Policy and Disaster Recovery

At times, Congress has chosen to use tax policy to provide

relief and support recovery following disaster incidents.

This In Focus discusses, in broad terms, disaster-related tax

policy. Challenges associated with using the tax code to

deliver federal financial assistance following natural

disasters are also discussed.

The Internal Revenue Code contains a number of

permanent disaster-related tax provisions. These include

provisions providing that qualified disaster relief payments

and certain insurance payments are excluded from income,

and thus not subject to tax. Taxpayers are also able to

deduct casualty losses and defer gain on involuntary

conversions (an involuntary conversion occurs when

property or money is received in payment for destroyed

property). The Internal Revenue Service can also provide

administrative relief to taxpayers affected by disasters by

delaying filing and payment deadlines, waiving

underpayment of tax penalties, and waiving the 60-day

requirement for retirement plan rollovers. The availability

of certain tax benefits is triggered by a federal disaster

declaration. Before 2017, casualty losses were generally

deductible. However, changes made in the 2017 tax

revision (P.L. 115-97) restrict casualty loss deductions to

federally declared disasters.

Temporary tax-related disaster relief measures were enacted

following a number of major disasters that occurred

between 2001 and 2017. For recent major hurricane events,

temporary tax relief measures were enacted following

Katrina and the other Gulf Coast hurricanes of 2005. There

was not, however, a comparable package of tax benefits

provided following tropical storm Irene in 2011 or

Hurricane Sandy in 2012. Some general disaster provisions

were available for all disasters declared in 2008 and 2009.

Congress also enacted tax relief following Hurricanes

Harvey, Irma, and Maria in 2017. Similar tax relief was

provided following the California wildfires in 2017 and

early 2018. The 2017 tax revision (P.L. 115-97) also

included certain provisions that were generally applicable

to 2016 or 2017 disasters.

Tax Relief for Businesses

For businesses, hurricanes like Katrina as well as Harvey

and Irma caused unprecedented property and earnings

losses. Employee displacement can create labor market

challenges that persist over time. Further, longer-term

supply chain disruptions can make it difficult for businesses

to resume operations after initial clean-up efforts are

complete.

Temporary Business Tax Relief Enacted Following

Previous Disasters

In the past after certain disasters, bonus depreciation and

enhanced expensing provisions have been enacted to reduce

the cost of business investment in clean-up and repairs.

Provisions providing accelerated cost recovery for

leasehold improvements can also reduce the cost for

businesses making storefront repairs in disaster zones.

Other tax policy changes that have been enacted to help

businesses affected by some disasters include expanded net

operating loss (NOL) carrybacks (loss carrybacks allow

taxpayers to offset taxable income in prior tax years),

lengthened time periods for acquiring replacement property

related to an involuntary conversion, and expanded

rehabilitation credits for buildings damaged by disasters.

Other provisions that have been enacted following certain

past disasters have attempted to support employment. These

include an expanded Work Opportunity Tax Credit

(WOTC) to reduce the cost of hiring employees located in

the disaster area and retention credits to offset a portion of

wages paid to employees by small businesses while

businesses were inoperable following the disaster.

Temporary tax credits for employer-provided housing have

also been enacted in the past.

Other housing-related and general redevelopment

provisions have been enacted following some past disasters.

For real estate developers, additional low-income housing

tax credits were provided for affected areas. Redevelopment

following a disaster has also been supported, in some

instances, by expanding new markets tax credits or by

expanding authority for tax-exempt or tax credit bonds.

Other provisions might be designed to support specific

industries or sectors affected by the disaster. For example,

tax provisions for small timber producers and public

utilities have been included in past disaster tax legislation.

Disaster Tax Relief for Businesses: Policy

Considerations

One consideration related to tax relief provisions for

business is timing. The tax code is not well-suited to

provide capital for clean-up, rebuilding, or recovery in the

short term. Reduced tax liabilities provide a future financial

benefit, but do not provide immediate access to capital that

may be needed following a disaster.

For many business-related provisions, the benefit is limited

to businesses with positive taxable income. Accelerated

cost recovery, special deductions, and tax credits provide

limited benefits to businesses with little profit or no tax

liability. Further, the 2017 tax revision provided full and

immediate expensing (bonus depreciation) for equipment

through 2022, and increased expensing for small

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Tax Policy and Disaster Recovery

businesses, limiting the scope for further accelerations of

cost recovery. Businesses with limited current income or

tax liability may, however, benefit from expanded NOL

carrybacks.

Some critics question whether certain disaster-related tax

benefits are necessary, given that much of the tax relief

accrues to taxpayers who would have rebuilt without

incentives. This critique raises the question of whether

disaster-related tax benefits are intended to encourage

certain behavior (rebuilding, for example), or with the

primary purpose of providing financial relief for businesses

affected by the disaster.

Disaster Tax Relief for Individuals: Policy

Considerations

Many low- and moderate-income individuals have zero

individual income tax liability. For these individuals,

additional exclusions from income or deductions will

provide little or no relief, as there is no tax burden to

eliminate. Further, low- and moderate-income individuals

may have limited wealth. Tax provisions designed to

enhance access to certain forms of savings (e.g., retirement

accounts) also provide limited relief to the least well-off.

Tax Relief for Individuals

There are also timing concerns in using the tax code to

provide individuals relief following a disaster. As was

noted for businesses, the tax code does not lend itself to

providing immediate relief.

Tax provisions might be used to provide financial relief to

individuals who have lost property, income, or both

following a disaster.

Charitable Giving Incentives for

Disasters

Temporary Individual Tax Relief Enacted Following

Previous Disasters

To provide relief for taxpayers experiencing a loss of

property, Congress has enacted legislation following certain

past disasters to expand the deduction for casualty losses

(beyond what is available under the permanent provision).

Following some previous disasters, Congress has also acted

to expand the NOL carryback period for individual losses

and to extend the time period for purchasing replacement

property under an involuntary conversion.

Following some past disasters, Congress acted in other

ways to change individual income tax policies to

accommodate disaster-related circumstances. Specifically,

in certain instances, an exclusion has been allowed for

certain debt forgiven. Policies have also been enacted, in

some cases, to enhance access to retirement plan funds.

To address housing issues, some past disaster tax relief

packages have allowed individuals housing persons

displaced by the storm an extra personal exemption and

allowed individuals to exclude the value of certain

employer-provided housing from income. The terms of

mortgage revenue bonds have been relaxed following

certain disasters, allowing certain individuals in the disaster

area access to below-rate mortgages financed by these

bonds.

Congress has also acted following certain past disasters to

enact provisions that protect certain tax benefits.

Specifically, for the earned income tax credit (EITC) and

child tax credit, special provisions have allowed individuals

to use previous years’ earnings when calculating the credit,

a policy change that could help those experiencing a loss of

income following the disaster. Education-related tax credits

have also been enhanced as part of certain disaster-related

tax packages. Congress has also chosen, as part of disaster

tax relief plans, to authorize the Secretary of the Treasury to

adjust the application of tax laws to prevent the disaster

from causing taxpayers to lose deductions or tax credits, or

having to change their filing status.

The charitable sector supports a wide range of activities

associated with disaster relief and longer-term recovery. At

times, Congress has acted following a disaster to provide

additional tax incentives to support the charitable sector.

Temporary Charitable Provisions Enacted

Following Previous Disasters

To encourage charitable giving in the wake of a disaster,

Congress has, in the past, relaxed certain income limitations

associated with the deduction for charitable giving. The

amount individuals can deduct for charitable use of a

vehicle (the charitable mileage rate) was also temporarily

increased in response to certain past disasters. Qualifying

mileage reimbursements have also been allowed to be

excluded from income.

Other tax incentives enacted in response to disasters have

encouraged particular types of charitable giving. Provisions

designed to encourage charitable contributions of food

inventory and books were enacted following Hurricane

Katrina. The enhanced deduction for contributions of food

inventory was later made permanent, while the enhanced

deduction for book inventory expired in 2011.

Charitable Giving Incentives for Disasters: Policy

Considerations

A key question regarding enhanced deductions for

charitable giving is how much additional giving results

from the policy change. Is it the tax benefits that drive

giving, or individuals’ desire to aid those affected by the

storm? Another question is how much giving is for disasterrelated charitable activities, as opposed to other activities or

uses. Charitable giving incentives are often applied broadly,

and it can be difficult to target them to a particular event or

geographic region.

Another consideration is who benefits from an enhanced

charitable giving deduction. On the individual side, the

value of the tax benefit of the charitable deduction is highly

concentrated among high-income taxpayers.

Molly F. Sherlock, Specialist in Public Finance

IF10730

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Tax Policy and Disaster Recovery

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