The US federal government has taken a number of steps to ease the tax burden on individuals and businesses affected by damage from Hurricanes Harvey, Irma and Maria in Texas, Florida, Georgia, Puerto Rico and the US Virgin Islands (USVI). The actual relief granted is limited, however, and in many cases involves fairly technical tax provisions and requirements.

Disaster Tax Relief Act

At the end of September, Congress passed and President Trump signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Pub. L. 115-63). The new law provides a variety of temporary relief measures for victims of hurricanes in US states and territories. Among the benefits the law provides to eligible taxpayers:

  • For individuals
    • Expanding the ability to claim certain personal casualty losses, including carrying the loss back to the previous taxable year
    • Permitting penalty-free distributions from eligible retirement plans
  • For businesses
    • Introducing income tax credits for employers that were required to temporarily shut down in the disaster areas affected by Hurricanes Harvey, Irma or Maria, up to US$2,400 per employee retained by the employer
  • For both individuals and businesses
    • Suspending limitations on deductibility of charitable contributions, for cash donations made toward relief efforts in the affected disaster areas

Extended filing deadlines

As set forth in IR-2017-155, the IRS has extended certain filing deadlines to January 31, 2018, for taxpayers in Florida, Georgia, parts of Texas, Puerto Rico and the US Virgin Islands, including the following:

  • Individuals with a filing extension until October 16, 2017 (but no extension of the April 18, 2017, deadline to make the related 2016 tax payments)
  • Businesses with a filing extension until September 15, 2017
  • Quarterly estimated tax payments due on September 15, 2017, and January 16, 2018
  • Calendar-year tax-exempt organizations whose 2016 extensions run out on November 15, 2017

United States property owned by a controlled foreign corporation

If a controlled foreign corporation (CFC) owns property located in the United States (United States property), then United States shareholders may recognize additional income as a result. For this purpose, as for income tax purposes generally, the territories of Puerto Rico and the USVI are not considered physically part of the United States.

Because some foreign corporations may have needed to move tangible property from Puerto Rico or the USVI to the US to avoid damage from Hurricane Irma or Hurricane Maria, the IRS announced relief measures for US shareholders of some foreign corporations that did so.

Under Notice 2017-55, if a CFC was holding tangible property prior to September 5, 2017, in an area that the Federal Emergency Management Agency (FEMA) identified as subject to a major disaster or emergency declaration, and the property was transported to the US for temporary storage in anticipation of, or as a result of, Hurricane Irma, then the property will not be treated as United States property. Similarly, tangible property will not be treated as United States property if it was held by a CFC prior to September 17, 2017, in an area that FEMA identified as subject to a major disaster or emergency declaration, and the property was transported to the US for temporary storage in anticipation of, or as a result of, Hurricane Maria.

Notice 2017-55 is applicable for a CFC's taxable year quarters ending on or after September 5, 2017, and on or before January 31, 2018.

Deemed presence for bona fide residency in a US territory

In order to be treated as a bona fide resident of a US territory (such as Puerto Rico or the USVI) for US federal tax purposes, an individual must meet a physical presence test, along with other requirements. For purposes of this test, regulations provide that for any 14-day period within which a major disaster occurs in a territory, and a FEMA Notice of a Presidential declaration of a major disaster has been issued, an individual will be deemed to be present in the territory if they are outside the territory because they left or are unable to return.

FEMA issued Notices of Presidential declaration of a major disaster for both Hurricanes Irma (USVI, September 7; Puerto Rico, September 10) and Maria (Puerto Rico, September 20). In Notice 2017-56, the Department of the Treasury extended the relief period for the physical presence test beyond the regulations' 14-day period, to run from September 6, 2017, to December 31, 2017. Moreover, a person who is outside of one of the affected territories on a day during that 117-day period will be treated as having left or being unable to return, and thus can be treated as present in the territory for purposes of the physical presence test. In effect, individuals seeking to establish residency in Puerto Rico or the USVI for 2017 will not be required to return to the territory during this calendar year.

Conclusion

These relief measures, and others that will be taken up by Congress and the IRS, should be of some help to taxpayers dealing with the aftermath of the destruction caused by hurricanes this year. Because the relief measures are so technical and limited, affected taxpayers must take care to ensure that they meet—and continue to meet—the applicable statutory and regulatory requirements before seeking to claim relief.