Carol McAtee's Blog

You or your family, friends or neighbors may have sustained damage to your homes from Hurricane Ian, which is known as a “casualty” event. The cost of repairing or replacing aspects of your home such as roofs, trees or shrubs can come into play on your tax return as casualty loss deductions. But it’s not as simple as just deducting the replacement or repair costs and there are many confusing details about how to determine your loss.

Most of the following information pertains to casualty losses due to a Federally declared disaster like Ian. And in this post, I am only addressing casualty losses to residential property. These issues are somewhat different for business properties, where, for example, the land and any buildings on it are considered as separate entities.

Change in Fair Market Value

In general, the amount of casualty loss you can deduct is equal to the fair market value of your property immediately before the casualty, reduced by the fair market value after the casualty – minus whatever you received as compensation from the insurance company. So, say your home was worth $300,000 before Ian and only $280,000 afterwards, and the insurance company gives you $15,000 – your possible casualty loss is the difference, $5,000.

One way of determining the loss of fair market value from a casualty event is through an appraisal. Unfortunately, the property is treated as a whole and the change in appraised value may not reflect the loss, for example, of your favorite oak tree. Improvements to the property like your garden and other outdoor features are considered integral parts of the property and are not considered separately.

Cost of Repairs or Replacement

A more common way of determining the casualty loss is basing it on the cost of repairs or replacement. So, if a tree came down on your garden shed and the shed costs $3,200 to rebuild or replace, your casualty loss for the shed is $3,200 – minus anything paid by your insurance. Likewise, the cost of removing the fallen tree and replacing it could be part of the casualty loss.

Keep in mind, to be deductible, repairs must actually be done, not be excessive, be necessary to bring the property back to its state before the casualty event, and not cause the property to be worth more than before.

When to Take the Casualty Loss

It may take months for the insurance company to tell you what they are paying you. So, the casualty loss deduction can be taken either in the tax year when you determine your loss, or in the preceding tax year. Sometimes this means that an Amended tax return should be filed to add your casualty loss deduction in the previous year. The IRS does require you to file “a timely insurance claim” if your loss is covered. The year you claim the deduction is known as the “disaster year.”

Casualty losses are reported on IRS Form 4684, Casualties and Thefts. But if the loss is NOT attributable to a federally declared disaster, the loss is taken on Schedule A as an Itemized Deduction. Your accountant will know to include the FEMA declaration number (DR-4673-FL for Hurricane Ian) on any return claiming a loss.

The maximum possible casualty loss is limited to the Adjusted Basis of the property, which can be determined by your tax accountant. And unfortunately for those who endured substantial damage or even total loss of their homes, the casualty loss is limited to 10% of your Adjusted Gross Income.

Disaster Assistance Payments

On the bright side, disaster victims generally do not to have to pay income tax on assistance payments they receive. Taxpayers in a Federally declared disaster area who receive grants from state programs, charitable organizations or employers to cover medical, transportation or temporary housing expenses do not have to include these grants in their income.

An exception is payments received for replacements for lost or destroyed property. In calculating your casualty loss, if the payment is for replacement of lost or destroyed property, then you would subtract that payment amount in figuring your casualty loss.

I hope this has given you a place to start in assessing a possible casualty loss. As always, your tax accountant is the best resource to determine the way forward and the many details that come into play.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

I have received many client inquiries about the Employee Retention Credit (ERC), part of the relief package passed by Congress to help small businesses deal with the coronavirus pandemic. A refundable government tax credit, the ERC enabled employers to continue paying staff in spite of suspended or reduced revenues due to shutdowns and slowdowns, during the most challenging times of the pandemic in 2020 and 2021.

The ERC is a key tax relief measure for both employers and employees and has helped businesses retain key personnel during difficult times. The ERTC is available to all businesses, regardless of size or industry. Best of all, you can file for it retroactively.

How to Qualify for the ERC
To qualify for the ERC, the employer must meet at least one of two conditions: Your business must have experienced a decline in business operations or gross revenue during 2020 or 2021, compared to the comparable quarter in 2019. OR Your business was at least partially suspended due to COVID-19 related government orders.

Funds Provided by the ERC
The ERC may cover up to $26,000 per employee ($11,000 is the average) depending on wages, health care and other personnel expenses business owners have already paid. The credit is equal to 50% of the qualifying wages paid to eligible employees, up to $10,000 of wages per employee per quarter. For 2020, the limit is 50% of $10,000 of wages for the year for each eligible employee. For 2021 the limit is 70% of $10,000 of wages for each quarter, for each employee.

For employers, the ERC is treated as a business tax credit, so in most cases it reduces the total amount of payroll tax owed. If the business’s payroll taxes owed are reduced to zero, the business may receive compensation above and beyond the original payroll tax liability.

Filing Retroactively
The ERC is applied to the year 2020 and 2021 payroll tax returns. If your business has previously filed those returns, it can retroactively claim the ERC through Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, with their quarterly federal tax return. That can result in reduction of the tax debt or a surplus credit, which could mean a cash refund.

Even if your business took a loan from the Paycheck Protection Program (PPP), you may be eligible for the ERC as well. However, businesses cannot claim a payroll expense as both an ERC wage and a forgivable payroll cost on the PPP forgiveness application. The ERC refund can be spent on anything by the company.

The statute of limitations for filing amended quarterly returns is up to three years from the date of filing the original quarterly employment tax return (Form 941). So, if your business qualified for the ERTC program in the third quarter of 2020, the amended documentation needs to be submitted by October 2023.

Navigating the process of the Employee Retention Credit, including eligibility rules and required paperwork, is best left to your accountant. Our professional staff at Carol McAtee & Associates can provide expert services and facilitate your ERC application accurately.


If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

AFTER HURRICANE IAN:
Casualty Losses to Business Property

One of my previous blog posts covered casualty losses to residential property due to a Federally declared disaster like Ian. In this post, I am addressing casualty losses to business properties. The issues are somewhat different for business properties, where, for example, the land and the building on it are considered as separate entities.

Change in Fair Market Value
In general, the amount of casualty loss you can deduct is equal to the fair market value of your property immediately before the casualty, reduced by the fair market value after the casualty – minus whatever you receive as compensation from the insurance company. As a simple example, say your business property was worth $800,000 before Hurricane Ian and only $750,000 afterwards, and the insurance company gives you $40,000 – your possible casualty loss is the difference, $10,000.

One way of determining the loss of fair market value from a casualty event is through an appraisal. Unfortunately, the property is treated as a whole and the change in appraised value may not reflect the loss, for example, of outdoor signage or other features. Improvements to the property like shrubs or other outdoor enhancements are also considered integral parts of the property.

Cost of Repairs or Replacement
A more common way of determining the casualty loss is by basing it on the cost of repairs or replacement. So, if a tree came down on your parking structure and it costs $10,200 to rebuild or replace the structure, your casualty loss is $10,200 – minus anything paid by your insurance.

Keep in mind, to be deductible, repairs must actually be done, may not be excessive, must be necessary to bring the property back to its state before the casualty event, and may not cause the property to be worth more than before.

Business Property Issues
Treasury regulations provide for casualty loss deductions for damaged property “whether or not incurred in a trade or business or in any transaction entered into for profit.” The regulations also specify that the deduction cannot be more than “the amount of the adjusted basis.”

Computing the adjusted basis may be more complicated for business properties. If the business property is totally destroyed, the adjusted basis of the property is considered the amount of loss.

An additional complication for business properties is that casualty loss deductions must be computed based on each single identifiable property separately, meaning the building and the land it is on. This is best illustrated by an example:

• In 1990, Acme Brothers Used Bookstore (not a real company of course) purchased land containing a small building for the lump sum of $90,000. The purchase price is allocated between the land ($18,000) and the building ($72,000) for purposes of determining basis.
• After the purchase, the Acme brothers planted trees and ornamental shrubs on the grounds surrounding the building.
• In 2002, the land, building, trees and shrubs are damaged by a hurricane. At the time of the casualty, the adjusted basis of the land is $18,000 and the adjusted basis of the building is $66,000. At that time the trees and shrubs have an adjusted basis of $1,200.
• The fair market value of the land and building immediately before the casualty is $18,000 and $70,000, respectively. Immediately after the casualty they are $18,000 and $52,000, respectively.
• The fair market value of the trees and shrubs immediately before the casualty is $2,000 and immediately after the casualty is $400.
• In 2003, Acme received an insurance payment of $5,000 to cover the damage to the building.
• The amount of the deduction allowable for the taxable year 2002 is $13,000 for the building and $1,200 for the trees and shrubs, computed as follows*:

Value of property immediately before casualty $70,000
Less: Value of property immediately after casualty $52,000
Value of property subject to casualty $18,000
Less insurance received $5000
Casualty deduction allowable $13,000

Value of trees and shrubs immediately before casualty $2,000
Less: Value of trees and shrubs immediately after casualty $400
Value of property subject to casualty $1,600
Casualty deduction allowable $1,200

* Chart reproduced from webinar “139 Disaster Relief Tax Opportunities,” Wednesday, October 5, 2022, by Karl Mill, JD; Alan Gassman, Esq.; and Kenneth J. Crotty, J.D., LL.M.

A casualty loss is one of the many ways that tax issues for businesses differ from issues for individuals. Your tax accountant is the best resource to evaluate your situation and the many details of business tax returns.

If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Helping Employees with Hurricane Ian Recovery:
Non-Taxable Disaster Relief Payments

Many of my clients and associates are involved in the Hurricane Ian relief and recovery efforts in one way or another, through company or personal donations of money, supplies or volunteer time. We all want to know that the money will get where it is supposed to go, so there are right (and wrong) ways to do our disaster relief.

A variety of charitable vehicles (e.g., company foundations, company-affiliated charities, company-advised funds at existing charities) can be effective and tax-efficient ways to accomplish employer/donor goals in times of disaster.

Qualified Disaster Relief Payments

A form of disaster relief becoming more and more common is companies providing funds specifically to their employees and their families impacted by disasters. Under Internal Revenue Code Section 139, companies can pay certain expenses for employees as deductible expenses that the employees will not have to include in income.

Known as “qualified disaster relief payments,” they include reimbursements or payments for reasonable and necessary personal, family, living or funeral expenses that are a result of a qualified disaster. In addition, amounts paid for reasonable and necessary expenses incurred for the repair of a personal residence or its contents also qualify. This can even apply to a vacation home, but not to a home that is rented to someone other than the employee.

A qualified disaster includes a federally declared disaster, and therefore applies to damages from Hurricane Ian in Florida, Georgia and South Carolina.

The payments can also be made to independent contractors and owners or relatives of owners of an S corporation or a C corporation. Again, the payments will not have to be included in income.

Employer Benefits

The employer will be able to deduct these payments of employee expenses and will not have to pay employment taxes, workers compensation, unemployment compensation, or pension contributions on the payments. Employers can even consider providing qualified disaster payments in lieu of other forms of compensation such as future bonuses.

Limitations

However, qualified disaster relief payments may not apply to payments made by a partnership to a partner – though if the partner puts their partnership interest into an S corporation before the payment is made, then it may qualify.

Another limitation is that expenses can only qualify if not already compensated by insurance or other sources, and these Section 139 payments cannot be deducted as casualty losses. In other words, there can be no “double dipping.”

Disaster Committees

Companies can choose to set up a disaster committee to organize the distribution of disaster relief to employees and their families. The committee can establish the total amount of the relief fund and address issues that could affect the amounts given to an employee, such as length or type of service.


If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Tax Law Changes for Tax Year 2022: Ten Tax Law Changes You Should Know About

The 2022 tax season is months away, but it’s a good time for you to be aware of some changes that may affect your 2022 personal tax return and tax planning. Some of the changes are reversals of policies adopted temporarily in tax years 2020-2021 to help American families with economic recovery coming out of the COVID-19 pandemic.

1. Standard Deduction
For most taxpayers, the standard deduction has replaced individually itemized deductions such as mortgage interest, medical expenses and charitable contributions. If your deductions exceed the standard, you can itemize for the best tax outcome – For example, one of my clients incurred high medical expenses one year due to a spouse’s lengthy hospital stay, so it made sense for her to itemize that year.

The standard deduction amounts were increased slightly for 2022 to account for inflation, with married couples allowed $25,900, plus $1,400 for each spouse age 65 or older. Singles can claim a $12,950 standard deduction or $14,700 if they’re at least 65 years old. Head-of-household filers get $19,400 for their standard deduction.

2. Child Tax Credit
The child tax credit reverts to its pre-2021 form, dropping back down to $2,000 per child for children 6 to 17 years of age and $3,600 for children 5 years old and younger. The former age limit of 16 years old returns and there will be no monthly advance payments of the credit in
2022.

3. Child Care Credit
For 2022, your child and dependent care credit for expenses such as day care is non-refundable, meaning it can reduce your tax burden but not refund additional money. The maximum credit percentage also drops from 50% to 35% and is only allowed for up to $3,000 in expenses for one child/dependent and $6,000 for more than one. In addition, the full credit will only be allowed for families making less than $15,000 a year. Above that, the credit starts to phase out.

4. Earned Income Credit
For tax year 2022, the minimum age for a childless worker to claim the EIC jumps from age 19 to 25, with a maximum age limit of 65 years. The maximum credit available for childless workers is reduced from $1,502 to $560. For workers with children, the credit amounts are increased slightly to adjust for inflation.

5. Stimulus Payments/Recovery Rebate
The economic stimulus payments in 2020 and 2021 were helpful for many clients who faced a drop in income due to the pandemic. But you will not receive any stimulus check payments in 2022, thus there is no recovery rebate credit if you did not receive your stimulus payments.

6. Third-Party Payment Like PayPal/Venmo
Starting with the 2022 tax year, these third-party payment settlement networks will report what you are paid over $600 during the year for goods or services. You will receive a 1099-K form covering money you received selling goods and services, but it does not apply to gifts or other payments from family and friends.

7. Charitable Contribution
For my clients who itemize their deductions, charitable contributions are one of the areas that are included as deductible. In 2020 and 2021, even taxpayers who used the standard deduction were eligible to receive an “above-the-line” deduction for up to $300 in charitable contributions. But this disappears in tax year 2022.

8. Classroom Expenses
For the 2022 tax year, teachers and other educators who use their own money to buy books, supplies and other materials for the classroom can deduct up to $300 of these out-of-pocket expenses. The deduction can be taken if you are a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. But parents whose children are homeschooled are not eligible for the deduction.

9. Standard Mileage Rate
This is a helpful change for my many clients who use vehicles for business purposes. With gas prices rising through much of 2021, the IRS adjusted the mileage rates used to calculate tax deductions for the use of a vehicle for business purposes. For vehicle mileage driven from January 1 to June 30, the 2022 standard mileage rate for business driving is 58.5¢ per mile. From July 1 to December 31, the mileage rate rises to 62.5¢ per mile.

10. Gift Tax Exclusion
The annual gift tax exclusion for 2022 rises from $15,000 to $16,000 per person receiving a cash gift, meaning you can give up to $16,000 to each child, grandchild or any other person in 2022 without having to file a gift tax return.


There are many other changes to the tax laws for tax year 2022 – some in specialized circumstances that only affect certain taxpayers and others that are small adjustments for inflation –but I hope this initial overview is helpful to you. Please have a healthy and successful fall season as we head into tax year 2022!


If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.