Disaster Tax Relief for the Midwest

Congressional research reportAug 20, 2008

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Prepared for Members and Committees of Congress

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The Midwestern Disaster Tax Relief Act of 2008 (S. 3322 and H.R. 6587) is intended to assist

with the recovery from the severe weather that affected the Midwest during the summer of 2008.

The Jobs, Energy, Families, and Disaster Relief Act of 2008 (S. 3335) includes some similar

provisions, but these are not limited to the Midwest disaster. The disaster relief in the three bills is

similar to that provided to assist with the recovery from the 2005 hurricanes and the 2007 Kansas

tornadoes. This report broadly discusses the disaster relief provisions in S. 3322/H.R. 6587 and S.

3335.

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Tax-Exempt Bonds .......................................................................................................................... 1

Low-Income Housing Tax Credit .................................................................................................... 1

Bonus Depreciation ......................................................................................................................... 2

Expensing ........................................................................................................................................ 2

Rehabilitation Credit ....................................................................................................................... 2

Net Operating Losses ...................................................................................................................... 3

Tax Credit Bonds............................................................................................................................. 3

Education Credits ............................................................................................................................ 3

Employer-Provided Housing ........................................................................................................... 3

Retirement Plan Distributions ......................................................................................................... 4

Employee Retention Credit ............................................................................................................. 4

Charitable Contributions ................................................................................................................. 4

Casualty Losses ............................................................................................................................... 5

Credit Computations........................................................................................................................ 5

Authority to Make Adjustments ...................................................................................................... 5

Additional Exemption ..................................................................................................................... 5

Mileage Rate.................................................................................................................................... 6

Mileage Reimbursement.................................................................................................................. 6

Discharge of Indebtedness............................................................................................................... 6

Involuntary Conversions ................................................................................................................. 6

Inventory ......................................................................................................................................... 7

Reporting......................................................................................................................................... 7

Author Contact Information ............................................................................................................ 7

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he Midwestern Disaster Tax Relief Act of 2008 (S. 3322/H.R. 6587), introduced by

Senator Grassley and Representative Loebsack, provides temporary tax relief intended to

assist with the recovery from the severe storms, tornadoes, and flooding that occurred

during the summer of 2008 in the Midwest. The relief would be available in the presidentially

declared disaster areas in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota,

Missouri, Nebraska, and Wisconsin, primarily in the areas determined by the President to warrant

individual or individual and public assistance.

The Jobs, Energy, Families, and Disaster Relief Act of 2008 (S. 3335), introduced by Senator

Baucus, contains some temporary tax provisions intended to assist in disaster recovery generally.1

Its provisions are not limited to the Midwest disaster—in general, the provisions would be

effective after December 31, 2007, and apply to any federally declared disaster occurring before

January 1, 2010. S. 3335 has fewer relief provisions than S. 3322/H.R. 6587. The ones it does

contain are generally similar to those in S. 3322/H.R. 6587, accounting for the differences that are

due to the fact that S. 3335 is not limited to the Midwest disaster.

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Section 2(e)(1) of the Grassley/Loebsack bill would allow affected states to issue tax-exempt

bonds to finance (1) qualified activities involving residential rental projects, nonresidential real

property, and public utility property located in the disaster area; and (2) below-market-rate

mortgages for low- and moderate-income homebuyers whose principal residences were damaged

by the disaster. Among other requirements, the bonds would have to be designated by the

appropriate state authority on the basis of providing assistance to where it was most needed.

Bonds would have to be issued prior to January 1, 2013, and the maximum face amount of bonds

each state could issue would be capped at $1,000 multiplied by the portion of the state’s

population in the disaster area. The Baucus bill does not include a similar provision.

Both the Grassley/Loebsack bill (§ 2(a)(1)(G), (e)(1)) and the Baucus bill (§ 504) would provide

similar, although not identical, modifications to temporarily ease the restrictions on mortgage

revenue bond financing under IRC § 143 for areas or taxpayers affected by the Midwest disaster

or federally declared disasters, respectively. The Grassley/Loebsack bill would also allow

operators of low-income residential rental projects financed by IRC § 142(d) bonds to rely on the

representations of displaced individuals regarding their income qualifications so long as the

tenancy began within six months of the displacement. The Baucus bill does not include a similar

provision.

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The low-income housing tax credit in IRC § 42 allows owners of qualified residential rental

property to claim a credit over a 10-year period that is based on the costs of constructing,

rehabilitating, or acquiring the building attributable to low-income units. Owners are allocated the

It would also amend provisions providing relief for past events. Section 511 would modify the New York Liberty

Zone benefits; e.g., it would provide a credit for employment withholding taxes to area governmental units with

qualifying project expenditures. Section 240 would extend the provision in the work opportunity credit for Hurricane

Katrina employees by one year.

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credit by a state. Each state’s allocation is limited to the greater of $2,000,000 or $1.75 times its

population, with both amounts adjusted for inflation (they are $2,325,000 and $2.00 for 2008).

For 2009, 2010, and 2011, the Grassley/Loebsack bill (§ 2(e)(2)) would permit affected states to

allocate additional amounts for use in the disaster area of up to $4.00 multiplied by the state’s

disaster area population. The Baucus bill has no similar provision.

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IRC § 168(k), as amended by the Economic Stimulus Act of 2008 (P.L. 110-185), allows

taxpayers who acquire certain types of property in 2008 to claim an additional depreciation

amount equal to 50% of the property’s adjusted basis for the year the property is placed in

service. The Grassley/Loebsack bill (§ 2(e)(3)) includes a 50% bonus depreciation provision for

taxpayers who suffered an economic loss due to the Midwest disaster. Among other requirements,

the property would have to rehabilitate or replace property damaged by the severe weather and be

similar to and located in the same county as such property. The property would have to be placed

in service no later than December 31, 2011 (December 31, 2012, for nonresidential real and

residential rental property). The Baucus bill has no similar provision.

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In general, capital expenditures must be added to the property’s basis rather than being expensed

(deducted in the current year). IRC § 179 provides an exception so that a business may expense

the costs of certain property in the year it is placed in service. In general, the total cost of the §

179 property cannot exceed $125,000, and the deduction is decreased by one dollar for every

dollar that the total cost of all property the business placed in service during the year exceeds

$500,000—both numbers are adjusted for inflation and would be $128,000 and $510,000 for

2008; however, the Economic Stimulus Act of 2008 (P.L. 110-185) increased the 2008 limitations

to $250,000 and $800,000. IRC § 198, meanwhile, allows taxpayers to expense environmental

remediation costs paid or incurred prior to January 1, 2008, for the abatement or control of

hazardous substances at a qualified contaminated site.

The Grassley/Loebsack bill (§ 2(e)(4)) would increase the § 179 limitations for taxpayers who

suffered an economic loss due to the Midwest disaster by $100,000 and $600,000 for qualified

disaster area property. Sections 2(e)(5) and (6) would extend § 198 expensing through 2010 for

qualified sites and permit taxpayers to expense 50% of pre-2011 qualified clean-up costs for the

removal of debris or the demolition of structures on business-related real property in the Midwest

disaster area. The Baucus bill (§ 502) would permit full expensing (subject to depreciation

recapture) of qualified expenditures for the abatement or control of hazardous substances released

on account of a federally declared disaster, the removal of debris or the demolition of structures

on business-related real property damaged by such a disaster, and the repair of business-related

property damaged by such a disaster.

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Under IRC § 47, taxpayers rehabilitating qualified buildings may claim a credit equal to 10% of

the qualifying expenditures (20% for a certified historic structure). The Grassley/Loebsack bill (§

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2(e)(7)) would increase this to 13% and 26% for expenditures made no later than December 31,

2010, to rehabilitate buildings and structures damaged by the disaster. The Baucus bill has no

such provision.

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Under IRC §§ 172 and 56, net operating losses (NOLs) are generally carried back for two years

and, for purposes of the alternative minimum tax, the NOL deduction is limited to 90% of

alternative minimum taxable income. Section 2(e)(8) of the Grassley/Loebsack bill would extend

the carryback period to five years and suspend the 90% limitation for qualified Midwest disaster

losses. Section 503 of the Baucus bill appears intended to provide similar treatment for qualified

disaster losses.

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Section 2(e)(9) of the Grassley/Loebsack bill would permit affected states to issue tax credit

bonds to pay the principal, interest, or premiums on qualified governmental bonds or to make

loans to political subdivisions to make such payments. Bondholders would claim a credit based

on a credit rate and the bonds’ outstanding face amount. Among other requirements, the bonds

would have to be issued between December 31, 2008, and January 1, 2010, and could not have a

maturity date beyond two years. The maximum amount of bonds that could be issued by states

with disaster area populations of at least 2 million would be $100,000,000; the cap would be

$50,000,000 for states with disaster area populations between 1 million and 2 million; and the

other states could not issue any bonds. The Baucus bill has no similar provision.

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Under IRC § 25A, individuals with eligible tuition and related expenses may claim the Hope

Scholarship or Lifetime Learning credit. The Hope credit is 100% of the first $1,000 of eligible

expenses plus 50% of the next $1,000 of eligible expenses, both adjusted for inflation ($1,200 for

2008). The Lifetime Learning credit equals 20% of up to $10,000 of eligible expenses. For

students attending school in the Midwest disaster area, the Grassley/Loebsack bill (§ 2(e)(10))

would allow any qualified higher education expenses to qualify for the credits, double the

adjusted $1,000 limitation, and increase the 20% to 40%. The Baucus bill has no similar

provision.

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The Grassley/Loebsack bill (§ 2(e)(11)) would exclude the value of employer-provided temporary

housing, limited to $600 per month, from the employee’s income and allow the employer to claim

a credit equal to 30% of that amount. The employee must have had a principal residence in the

disaster area and perform substantially all employment services for the employer in that area. The

employer must have a trade or business in the disaster area. The provision would only apply

during a six-month period. The Baucus bill has no such provision.

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Section 2(e)(12) of the Grassley/Loebsack bill would waive the 10% early withdrawal penalty in

IRC § 72(t) on qualifying distributions made before January 1, 2010, of up to $100,000 for

individuals with a principal place of abode in the Midwest disaster area who sustained an

economic loss due to the disaster. The funds could be re-contributed to a qualified plan over a

three-year period and receive tax-free rollover treatment. Any taxable portion of a distribution

could be included in income over a three-year period. Section 505 of the Baucus bill includes a

similar provision, applicable to distributions made within the 15-month period after a disaster.

Section 2(e)(12) would also increase the amount that qualifying individuals could borrow from

their plans without immediate tax consequences. Under IRC § 72(p), the maximum amount that

may be borrowed without being treated as a taxable distribution is generally the lesser of (a)

$50,000 or (b) the greater of $10,000 or 50% of the present value of the employee’ nonforfeitable

accrued benefit. For loans made between July 30, 2008, and December 31, 2009, the

Grassley/Loebsack bill would increase this to the lesser of (1) $100,000 or (2) the greater of

$10,000 or 100% of the accrued benefit’s present value. Certain loan repayment dates would be

extended by one year. The Baucus bill includes a similar provision, applicable to loans made

within 18 months after a disaster.

Under the Grassley/Loebsack bill, individuals who had received a qualifying distribution to buy

or construct a principal residence in the Midwest disaster area and were unable to buy or

construct the home due to the disaster could re-contribute the funds to a qualified plan without tax

consequences. The distribution must have occurred during the six-month period ending on the

disaster date. The Baucus bill has a similar provision for distributions received during the sixmonth period prior to a disaster.

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The Grassley/Loebsack bill (§ 2(e)(13)) would provide a credit for disaster-damaged businesses

that continued to pay their employees’ wages, regardless of whether they performed services.

Eligible employers would be those who (1) had active businesses in the disaster area that were

rendered inoperable due to damage caused by the severe weather and (2) generally employed no

more than 200 employees per day during the year before the disaster. Eligible employees would

be those whose principal place of employment at the time of the disaster was with the eligible

employer in the disaster area. The credit would equal 40% of the employee’s first $6,000 in

wages paid between the date the business became inoperable and the date it resumed significant

operations, but before January 1, 2009. Section 505 of the Baucus bill has a similar provision that

is applicable during the four-month period after a disaster.

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In general, a charitable contribution deduction may not exceed a specified percentage of an

individual’s contribution base or a corporation’s taxable income (computed with adjustments).

The Grassley/Loebsack bill (§ 2(e)(14)) would allow a larger deduction for substantiated cash

contributions made in 2008 to qualifying charities for Midwest disaster relief. The deduction

would be allowed to the extent it did not exceed the difference between the taxpayer’s

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contribution base/taxable income and the deduction for other charitable contributions. It would

not count for purposes of the overall limitation on itemized deductions. The Baucus bill (§ 505)

has a similar provision for contributions made during the 18-month period after a disaster.

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Under IRC § 165, individuals may deduct losses of property not connected to a trade or business

if due to a casualty or theft. In addition to losses arising from actual damage done by the casualty,

an individual in a presidentially-declared disaster area has a casualty loss if ordered, within 120

days of the area’s designation, by a state or local government to demolish or relocate his or her

home because it is unsafe due to the disaster. There is no loss to the extent an individual is

reimbursed through insurance or other means. There are several limitations, including that losses

are deductible only to the extent that (1) the amount of the loss from each event exceeds $100 and

(2) the amount of all losses (after applying the $100 limitation) exceeds 10% of adjusted gross

income (special rules apply if the taxpayer has both personal casualty losses and gains). The

deduction is claimed in the year of the loss, although a loss in a presidentially-declared disaster

area may be deducted in the year prior to the disaster.

The Grassley/Loebsack bill (§ 2(e)(15)) would waive the $100 and 10% floors for Midwest

disaster casualty losses. Section 2(b) would permit taxpayers who claimed a deduction for a

principal residence casualty loss and later received reimbursement under a federal or state

program to file an amended return to reduce the deduction by the amount of the reimbursement

(thus, the tax benefit doctrine, which would otherwise require the taxpayer to include the

reimbursement in income, would not apply). The Baucus bill (§ 501) would waive the 10% floor

for net disaster losses and include the losses in the standard deduction. It would also increase the

$100 floor to $500 for post-2008 taxable years, not limited to casualties that are federally

declared disasters.

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The Grassley/Loebsack bill (§ 2(e)(16)) appears intended to allow qualifying disaster victims to

compute this year’s child tax and earned income credits using last year’s earned income. The

Baucus bill has no similar provision.

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Section 2(e)(17) of the Grassley/Loebsack bill would authorize the Treasury Secretary to make

adjustments in the application of the tax laws for 2008 and 2009 so that temporary relocations due

to the disaster would not cause taxpayers to lose dependency exemptions or child credits or to

have a change of filing status. No similar provision is in the Baucus bill.

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The Grassley/Loebsack bill (§ 2(f)(1)) would allow individuals who housed, without charge,

displaced Midwest disaster victims in their homes for at least 60 consecutive days to claim a $500

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personal exemption for each person, limited to $2,000. The exemptions could be claimed in 2008

and 2009 (a person could only be claimed once by the taxpayer). Among other requirements, the

displaced person’s principal place of abode must have been in the disaster area. Section 505 of the

Baucus bill includes a similar provision, applicable to the two years after a disaster.

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Under IRC § 170(i), individuals using their personal vehicles for charitable purposes may claim a

deduction equal to 14 cents per mile. Section § 2(f)(2) of the Grassley/Loebsack bill would set the

rate for 2008 at 70% of the standard business mileage rate (rounded to the next highest cent) for

vehicles used for Midwest disaster relief. That rate is currently 58.5 cents per mile. Section 505 of

the Baucus bill has a similar provision that is applicable during the 18-month period after a

disaster.

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Section 2(f)(3) of the Grassley/Loebsack bill would exclude from a volunteer’s gross income any

qualifying mileage reimbursements received for the operating expenses of his or her passenger

automobile from a charity helping with disaster recovery, applicable until December 31, 2008.

Section 505 of the Baucus bill includes a similar provision applicable to the 18-month period

following a disaster.

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When all or part of a debt is forgiven, the amount of the cancellation is ordinarily included in

income in the year of discharge, although deferral or permanent exclusion may be available under

IRC § 108. Section 2(f)(4) of the Grassley/Loebsack bill would allow affected individuals to

exclude non-business debt that was forgiven by a governmental agency or certain financial

institutions if the discharge occurred between the date of the disaster and January 1, 2010. The

individual must have had a principal place of abode in the Midwest disaster area (if the home was

in an area determined by the President to only warrant public assistance, then he or she must also

have suffered an economic loss due to the severe weather). The Baucus bill (§ 505) has a similar

provision for discharges occurring in the 18-month period after a disaster.

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An involuntary conversion occurs when property is converted to cash or other property because

of, for example, its complete or partial destruction. The taxpayer has a gain if the cash or property

received is worth more than the basis of the converted property. Under IRC § 1033, the gain is not

immediately taxable if the property is converted to property that is similar or related in service or

use. However, if the property is converted to cash or dissimilar property, the taxpayer must

recognize any gain unless he or she purchases similar property within a certain time period, in

which case he or she may elect to only recognize gain to the extent that the amount realized from

the involuntary conversion exceeds the cost of the new property. The time period generally ends

two years after the close of the first taxable year in which any gain is realized, but is increased in

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certain situations (e.g., to three years if the converted property is business real property and four

years if it is the taxpayer’s principal residence or its contents that were involuntarily converted

due to a presidentially-declared disaster). The Grassley/Loebsack bill (§ 2(f)(5)) would increase

the time period to five years for Midwest disaster area property that was converted due to the

severe weather so long as substantially all of the use of the replacement property is in the disaster

area. The Baucus bill (§§ 505, 501) has a similar provision for federally declared disasters and

clarifies existing law regarding property damaged by such disasters.

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Under IRC § 170(e)(3), while donors of inventory may claim a charitable deduction equal to their

basis in the inventory (typically its cost), C corporations may claim an enhanced deduction equal

to the lesser of (1) basis plus 50% of the property’s appreciated value or (2) two times basis. A

special rule permitted other businesses that donated wholesome food inventory to claim the

enhanced deduction if donated no later than December 31, 2007. Another special rule allowed C

corporations to claim an enhanced deduction for donations of book inventory to public schools if

made no later than December 31, 2007. The Grassley/Loebsack bill (§§ 3, 4) would extend the

two inventory provisions until December 31, 2009, and create a special temporary rule for food

donations made by qualified farmers and ranchers. The Baucus bill (§§ 236, 237) would extend

the inventory provisions through 2008 and has the special rule.

Both the Grassley/Loebsack bill (§ 5) and the Baucus bill (§ 512) would require that § 501(c)(3)

organizations provide information regarding their disaster relief activities and contributions on

the annual information return (Form 990). The provisions would be applicable to returns due after

December 31, 2008.

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Erika Lunder

Legislative Attorney

/redacted/@crs.loc.gov, 7-....

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