Senate passes Grassley’s tax relief package for flood and tornado recovery

Updated: November 12, 2008

WASHINGTON --- A year-end bill to extend expiring federal tax provisions was passed by the Senate today and includes a $6 billion package of disaster-related tax relief sponsored by Senator Chuck Grassley and tailored to help flood and tornado victims in Iowa and other states recover and rebuild.

The disaster tax relief package is separate from additional federal dollars for disaster recovery that Congress may provide in year-end appropriations legislation. The House of Representatives could take up the tax bill at any time. Grassley urged that it be passed quickly and sent to the President’s desk to be signed into law.

“This disaster tax relief package is a major victory for Iowa. It was worth fighting for in Congress because these provisions proved their value for disaster recovery after Hurricane Katrina. They are designed to help small businesses keep their doors open, communities rebuild infrastructure, charities raise more relief money, and families rebuild their homes and lives,” Grassley said.

The disaster tax relief package is modeled after what was passed for Hurricane Katrina victims three years ago. Grassley has kept the pressure on Congressional leaders all summer to take similar action for natural disaster victims in Iowa and throughout the Midwest. In 2005, while Grassley was chairman of the tax-writing committee in the Senate, a major individual tax relief package was signed into law within three weeks of the Katrina disaster. A few weeks later, Congress followed up with an infrastructure and business tax relief package.

Grassley’s disaster tax relief package was cosponsored this summer by every member of Iowa’s congressional delegation and Republican and Democratic senators from nine other states hard hit this year by severe weather.

“Iowans deserve to have every kind of help that Washington can provide,” Grassley said. “The kind of tax relief in this legislation translates into real help for small businesses who need every tool they can access in order to rebuild and keep operating after the devastating storms. It lowers their tax liability and puts small business owners in a better position to balance their books. Small businesses will be able to more quickly write off the demolition and remediation expenses. They will be able to take a tax credit for maintaining employees who they would otherwise have to lay off.”

Among other provisions, the legislation would let disaster victims with damage to their primary residence tap their assets and access cash by withdrawing money from retirement plans without tax penalties; suspend limits on tax incentives for charitable contributions, strengthening local and other fundraising drives collecting money to help small businesses and families recover; create tax-credit bond authority to help local governments rebuild infrastructure; increase the amount of tax-exempt bond authority to help businesses receive below-market interest rate financing; remove limitations on deducting casualty losses due to natural disaster; and reduce the 2008 tax burden for small and mid-sized businesses by substantially increasing the 2008 deductions for the depreciation and expensing of business property.

Here’s a summary of what’s in the tax-extenders bill for disaster tax relief.

MIDWESTERN DISASTER TAX RELIEF

Midwestern Disaster Area Tax Relief. The proposal provides tax relief for victims of

the Midwestern disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan,

Minnesota, Missouri, Nebraska and Wisconsin. The proposals are applicable to floods,

severe storms, and tornadoes that are declared by FEMA on or after May 20, 2008, and

before August 1, 2008. Disasters that occur prior to this period qualify for tax relief if the

FEMA disaster declaration occurs during this period.

A. RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR ASSISTANCE

The proposals immediately below benefit taxpayers located in all counties in the ten

states mentioned above that are presidentially-declared (FEMA) major disaster areas

determined to warrant individual assistance, individual and public assistance, or public

only assistance due to flooding, tornadoes, or severe storms.

Qualified Disaster Recovery Assistance Distributions. The proposal waives the 10

percent penalty tax if a distribution from an individual retirement account (“IRA”) or taxfavored

retirement plan (e.g., Code sections 401(k), 403(b), or 457(b) plans) is

considered a qualified Disaster Recovery Assistance distribution (“qualified

distribution”). A distribution is considered a qualified distribution if it is made on or after

the presidentially-declared disaster date (“applicable declaration date”) and before

January 1, 2010 and is made to an individual whose principal residence on the applicable

declaration date is located in a Midwestern disaster area and who sustained an economic

loss by reason of the disaster. Other principal features include the following: (i) the

waiver is limited to amounts up to $100,000; (ii) the mandatory withholding rules

applicable to eligible rollover distributions would not apply; (iii) participants receiving a

qualified distribution would be permitted to spread the income tax resulting from receipt

of the distribution ratably over three years; and (iv) amounts distributed may be recontributed

to the plan over a three-year period following the distribution and such recontributed

amounts would not be includible in income in the tax year in which the

distribution was made (e.g., if a participant received a qualified distribution in 2008 and

subsequently re-contributed the distribution amount in 2009, the participant may file an

amended return requesting a refund for the amount taxable in 2008). The estimated

revenue loss of this proposal is $42 million over ten years.

Recontribution of Withdrawals for Home Purchases. The proposal allows

distributions for home purchases that were made from a Code section 401(k) or 403(b)

plan or IRA after the date which is 6 months before the applicable declaration date and

before the day after the applicable declaration date and that were not finalized because of

the tornadoes and floods giving rise to the designation of the area as a disaster area to be

re-contributed to the plan or IRA tax-free (i.e., the recontributions would be treated as

rollovers). Amounts must be re-contributed within 5 months from the date of enactment

of this bill in order to receive favorable tax treatment. The proposal is estimated to have

a negligible revenue effect over ten years.

Loans from Qualified Plans. The proposal effectively doubles the limitation on loans

from a 401(k), 403(b), or a governmental 457(b) plan by allowing participants located in

a Midwestern disaster area and who sustained economic loss by reason of the tornadoes

and floods giving rise to the designation of the area as a disaster area to receive loans up

to the lesser of $100,000, or 100 percent of the vested accrued benefit for loans made

after the date of enactment and before January 1, 2010. In addition, outstanding loan

payments due on or after the applicable declaration date and before January 1, 2010 may

be deferred an additional 12 months, with appropriate adjustments for interest. The

proposal is estimated to have a negligible revenue effect over ten years.

Suspension of Casualty Loss Limitations. Under present law, non-business casualty

losses are deductible by taxpayers who itemize only to the extent they exceed ten percent

of adjusted gross income and a one-hundred dollar floor. In some circumstances,

taxpayers are permitted to include a current-year casualty loss on an amended prior year

return. The proposal eliminates the ten percent and one-hundred dollar floor for casualty

losses resulting from the Midwestern disaster and incurred in the disaster area, including

those claimed on amended returns. The estimated revenue loss of this proposal is $61

million over ten years.

Special Look-Back Rule for EIC and Refundable Child Credit. To deal with the

situation where 2008 records are lost or destroyed in a disaster, this proposal allows lowincome

working families an election to use their 2007 income amount for purposes of

determining their eligibility for the refundable earned income credit and the refundable

child tax credit. The estimated revenue loss of this proposal is $89 million over ten years.

Additional Personal Exemption for Housing Victims. Current law provides a personal

exemption for taxpayers, their spouses, and dependents. The proposal allows taxpayers

who house up to four dislocated persons from the Midwestern disaster for a minimum of

sixty days in their principal residences an additional personal exemption of $500 per

dislocated person (maximum additional personal exemption increase of $2,000). Family

members (other than spouses and dependents) staying with the taxpayer may qualify, and

the housing must be provided rent-free. This proposal would not affect any deductions or

exemptions for the dislocated person on the dislocated person’s tax return. The deduction

can be claimed in 2008 and 2009, but cannot be claimed in both years with respect to the

same person. The estimated revenue loss of this proposal is $10 million over ten years.

Exclusion for Certain Cancellations of Indebtedness. Under current law, gross

income generally includes any amount realized from the discharge of indebtedness. The

proposal ensures that individuals are not taxed on personal debt that is discharged in

response to damage suffered from the Midwestern disaster. For example, if a house is

damaged or destroyed and the mortgage lender discharges all or part of this mortgage

debt, the amount discharged is not treated as income as a result of the proposal. The

estimated revenue loss of this proposal is $6 million over ten years.

Extension of Replacement Period for Property Lost Due to Floods or Tornadoes in

the Midwestern Disaster Zone.Present law allows taxpayers not to recognize gain with

respect to homes that are damaged or destroyed as a result of a presidentially-declared

disaster if the taxpayer replaces the property within a four-year period. Business property

that is destroyed must be replaced within a two-year period to avoid gain recognition.

The proposal extends the replacement period to five years for principal residences and

business property that was damaged or destroyed within any presidentially-declared

disaster area for the Midwestern disaster, and the replacement property must be located in

the same county. The estimated revenue loss of this proposal is $65 million over ten

years.

B. RELIEF FOR ALL COUNTIES DECLARED ELIGIBLE FOR

INDIVIDUAL ASSISTANCE OR INDIVIDUAL AND PUBLIC

ASSISTANCE

The proposals immediately below benefit individuals and businesses located in all

counties in the ten states above presidentially-declared (FEMA) major disaster areas

determined to warrant individual assistance, or individual and public assistance, due to

flooding, tornadoes, or severe storms.

Relief for Individuals and Families

Employee Retention Credit. This proposal provides a 40 percent tax credit for wages

paid up to $6,000 if paid after the applicable disaster date, and before January 1, 2009, by

employers with 200 or fewer employees located in the Midwestern disaster area who

continue to pay their employees while their business is inoperable. The estimated

revenue loss of this proposal is $93 million over ten years.

Expansion of Hope Scholarship and Lifetime Learning Credit. Current law allows a

Hope Scholarship Credit in the first two years of post-secondary education equal to 100%

of the first $1,000 of qualified tuition and related expenses, and 50% of the next $1,000

for a maximum credit of $1,500. There is also a Lifetime Learning Credit available to

students enrolled in one or more courses at the undergraduate or graduate level (whether

or not pursuing a degree), equal to 20% of the first $10,000 in qualified tuition and

related expenses. The proposal doubles the Hope Credit dollar amounts so the maximum

credit would be $3,000, and doubles the Lifetime Learning Credit percentage from 20%

to 40%, for a maximum Lifetime Learning Credit of $4,000 for students attending

undergraduate or graduate institutions in the Midwestern disaster area. Room, board,

books and fees would also be considered qualified expenses. This proposal applies to tax

years 2008 and 2009. The estimated revenue loss of this proposal is $121 million over

ten years.

Secretarial Authority to Adjust Taxpayer and Dependency Status for Taxpayers.

The Midwestern disaster has displaced thousands of individuals. Under present law, a

prolonged change in a family’s living situation could affect its eligibility for various tax

benefits. The proposal gives the Treasury Department the authority to ensure taxpayers

do not lose deductions, credits or filing status because of dislocations from the

Midwestern disaster. The proposal is estimated to have a negligible revenue effect over

ten years.

Mortgage Revenue Bonds. Section 143(d) requires that 95 percent of net proceeds of

mortgage revenue bonds are used to finance residences of mortgagors who had no present

ownership interest in their principal residences at any time during the 3-year period

ending on the date their mortgage is executed. The proposal permits states to issue taxexempt

bonds to finance low-interest loans to taxpayers whose principal residence has

been damaged as a result of a disaster. Disaster victims could use these low-interest

loans to repair or reconstruct their homes. The provision is effective for qualified

disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is

included in the estimate below on Tax-exempt Bonds.

Tax Relief for Businesses

Tax-exempt Bonds. Provides Iowa, Arkansas, Illinois, Indiana, Kansas, Michigan,

Minnesota, Missouri and Wisconsin the authority to issue a special class of qualified

private activity bonds, called Midwestern disaster area bonds, outside of the state volume

caps. The maximum aggregate bond authority with respect to any state cannot exceed

$1,000 times the portion of the state population which is located in a Midwestern disaster

area. Midwestern disaster area bonds can be issued by States and municipalities. Bond

proceeds can be used to pay for acquisition, construction, and renovation of

nonresidential real property, qualified low income residential rental housing, and public

utility property (e.g., gas, water, electric and telecommunication lines) located in the

Midwestern disaster area. The current low-income housing targeting rules are relaxed so

that more bond proceeds can be used to rebuild housing in the Midwestern disaster area.

Interest payments on the bonds are not subject to the AMT. The authority to issue

Midwestern disaster area bonds expires after December 31, 2010. In the case of project

involving a private business use, either the person using the property suffered a loss in a

trade or business attributable to severe storms, tornadoes or flooding or is a person

designated by the Governor of the State as a person carrying on a trade or business

replacing a trade or business with respect to which another person suffered such loss. In

the case of a project relating to public utility property, the project must involve the repair

or reconstruction of public utility property damaged by sever storms, tornados or

flooding. The total estimated revenue loss of this proposal and the proposal for

mortgage revenue bonds is $1.320 billion over ten years.

Low Income Housing. Under current law, States receive allocations of low-income

housing tax credits based on population. The proposal allows States to allocate volumes

of additional housing credit amounts in years 2008, 2009, 2010 of $8 per person in the

Midwestern disaster area measured by population data issued before the earliest

applicable disaster date for Midwestern disaster areas within the applicable state. The

total estimated revenue loss of this proposal and the proposal for representations

regarding income eligibility is $2.203 billion over ten years.

Expensing Property. Current law permits certain small businesses to deduct up to

$250,000 of the cost of property used in the business. The proposal would increase this

amount to $350,000 for qualifying expenditures made in the disaster area through

December 31, 2011 (December 31, 2012 for nonresidential real property and residential

rental property). This proposal would also increase the level of investment at which

benefits phase out from $350,000 to $1.4 million of qualifying purchases, thus allowing

more businesses to use this tax benefit in rebuilding. This proposal applies to businesses

that suffered property damage in the Midwestern disaster area and that placed property in

service in the Midwestern disaster area after the date of the applicable disaster. The

estimated revenue loss of this proposal is $2 million over ten years.

Additional Depreciation. Permits businesses that suffered damage as a result of the

Midwestern disasters to claim an additional first-year depreciation deduction equal to 50

percent of the cost of new real and personal property investments made in the

Midwestern disaster area. The additional deduction applies to purchased computer

software, leasehold improvements, certain commercial and residential real estate

expenditures and equipment. All depreciation deductions (including bonus depreciation)

would be exempt from the AMT. The proposal applies to property placed in service

through December 31, 2011 (December 31, 2012 for real property). In addition, the

Department of Treasury would be granted authority, on a case-by-case basis, to extend

the bonus depreciation deadline for placing long-lived property in service in certain

circumstances for the Presidentially-declared disaster area for up to one year. The

estimated revenue loss of the proposal for additional depreciation of personal property is

$8 million over ten years. The estimated revenue loss of the proposal for additional

depreciation of real property is $171 million over ten years. The total estimated revenue

loss of this proposal is $179 million over ten years.

Expensing Demolition and Clean-up Costs. Under the proposal, 50 percent of the costs

(that would otherwise be capitalized) related to site cleanup and demolition would be

deductible by businesses. Effective for amounts paid or incurred beginning on the

applicable disaster date and ending on December 31, 2010. The estimated revenue loss of

this proposal is $3 million over ten years.

Expensing Environmental Remediation Costs. The proposal extends the deductibility

of costs of cleaning up a qualified contamination site, if the release (or threat of release)

or disposal of a hazardous substance is attributable to the disaster described in the

Presidential declaration in the Midwestern disaster area. Effective for expenditures paid

or incurred beginning on the applicable disaster date and ending on January 1, 2011. The

estimated revenue loss of this proposal is less than $500,000 over ten years.

Increase in Rehabilitation Credit. For buildings that were damaged or destroyed in an

applicable disaster, the rehabilitation credit is raised from 10 percent to 13 percent of

qualified expenditures for any qualified rehabilitated building other than a certified

historic structure, and the rehabilitation credit is raised from 20 percent to 26 percent of

qualified expenditures for any certified historic structure. The estimated revenue loss of

this proposal is $3 million over ten years.

Five-year Net Operating Loss Carryback for Certain Amounts. The proposal

extends the net operating loss carryback period from 2 to 5 years for net operating losses

attributable to (i) new investment and repairing existing investment in the areas damaged

by the Midwestern disaster; (ii) business casualty losses caused by the Midwestern

disaster; and (iii) moving expenses and temporary housing expenses for employees

working in areas damaged by the Midwestern disaster. The proposal is effective on the

date of enactment. The estimated revenue loss of this proposal is $37 million over ten

years.

Tax Credit Bonds. Authorizes Midwestern disaster States to issue debt service tax

credit bonds providing credits against Federal income tax instead of interest payments, so

that these States can provide assistance to communities unable to meet their debt service

requirements as a result of the flooding, tornadoes, and severe storms. The maturity of

the bonds cannot exceed 2 years. At least 95 percent of bond proceeds must be used to

redeem or to pay principal, interest or premiums on an outstanding bond, and such

proceeds so used must be matched by an equal amount of State funds. The maximum

amount of tax credit bonds shall not exceed $100 million for any state with an aggregate

population located in the Midwestern disaster areas within such state of at least 2 million;

$50 million for states with such populations of at least 1 million but less than 2 million;

and zero for any other state. The estimated revenue loss of this proposal is $152 million

over ten years.

Tax Incentives for Charitable Giving

Temporary Suspension of Limitations on Charitable Contributions. The amount

allowed as a charitable deduction in any taxable year may not exceed ten percent of the

corporation’s taxable income or fifty percent of an individual’s adjusted gross income.

The proposal temporarily waives these limits regarding charitable cash contributions

dedicated to Midwestern disaster relief efforts. The proposal is effective for

contributions paid during the period beginning on the earliest applicable disaster date for

all States and ending on December 31, 2008. The estimated revenue loss of this proposal

is $433 million over ten years.

Increase in Standard Mileage Rate for Charitable Use of Vehicles. The mileage rate

individuals may use to compute a tax deduction for personal vehicle expenses associated

with charitable work is statutory and has not been increased since 1997 and is currently at

14 cents per mile. For a taxpayer assisting in relief efforts related to the Midwestern

disaster, the proposal sets the charitable mileage rate at seventy percent of the current

standard business mileage rate, beginning on the applicable disaster date and ending on

December 31, 2008. The estimated revenue loss of this proposal is $9 million over ten

years.

Exclusion from Income of Mileage Reimbursements for Charitable Volunteers. In

general, reimbursements received for operating expenses of a personal vehicle used in

connection with charitable work in excess of the statutory charitable mileage rate are

taxable income to the recipient. However, reimbursements for charitable mileage

attributable to the Midwestern disaster up to the amount of the standard business mileage

rate will not be considered taxable income through December 31, 2008. The estimated

revenue loss of this proposal is $1 million over ten years.

Tax benefits not available with respect to certain property. The proposals relating to

additional first-year depreciation, increased expensing, and the five-year carryback of

NOLs do not apply with respect to certain property. Specifically, as was done in the tax

relief package for the Katrina disaster, the tax relief provisions do not apply with respect

to golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, or

liquor stores. The proposals also do not apply with respect to any property used directly

in connection with gambling, animal racing, or the on-site viewing of such racing, and

with respect to buildings or portions of buildings dedicated to such activities (except if

the portion so dedicated is less than 100 square feet).

NATIONAL DISASTER RELIEF

The proposal provides tax relief for victims of Federally-declared disasters other than the

Midwestern disasters and occurring after December 31, 2007 and before January 1,

2010. The same limitations with respect to certain property apply to this relief.

Individual Loss Provision. Individual casualty losses are itemized deductions to extent

they exceed $100 per casualty floor and 10 percent of AGI under section 165(h)(1) and

(2). The proposal reforms casualty loss rules to allow more disaster victims to claim

individual property losses. Under current law, taxpayers can only claim a loss that

exceeds $100 and 10 percent of the taxpayer’s adjusted gross income. This bill would

waive the restrictive 10 percent rule, raise the $100 floor to $500, and allow nonitemizers

to use these losses as a standard deduction. The provision is effective for

qualified disasters occurring after December 31, 2007 and before January 1, 2010. The

proposal is estimated to cost $934 million over ten years.

Qualified Disaster Expenses. Environment remediation expenditures incurred after

December 31, 2007 are capitalized (expired section 198 allowed current expensing).

Demolition costs of buildings are capitalized under section 280B. Debris removal and

repairs costs are either currently expensed or capitalized depending on a facts and

circumstances test under section 263(a). The proposal allows disaster victims to write off

and immediately recover demolition, clean up, repair, and environmental remediation

expenses. Under current law, taxpayers may be required to capitalize these expenses and

recover the costs over an extended period of time. The provision is effective for qualified

disasters occurring after December 31, 2007 and before January 1, 2010. The proposal is

estimated to cost $32 million over ten years.

Treatment of Net Operating Losses Attributable to Qualified Disaster Casualty

Expenses. Net operating losses may be carried back two years under section 172(b)(1).

The proposal extends from two to five years the time period taxpayers can claim casualty

losses or qualified disaster expenses. When taxpayers carry losses back to prior years,

they receive a refund of the taxes that they paid in the earlier year. This prompt refund

can help them reinvest in their businesses or make ends meet in the aftermath of a

disaster. The provision is effective for qualified disasters occurring after December 31,

2007 and before January 1, 2010.The proposal is estimated to cost $162 million over ten