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To Our Clients and Friends:
On behalf of our firm I am pleased to welcome you to this
inaugural issue of our electronic client newsletter. As New
Orleans and the Gulf South begin to rebuild from this
devastating hurricane season, we look forward to providing you
with helpful business information, such as the following tax
relief update.
Our thanks go out to all of you who have expressed your
concern in the past two months, and we want to express our
continued support to the many who have been so profoundly
affected by Hurricanes Katrina and Rita. We share in our
community's spirit of hope and determination and are delighted
that we already have returned to our New Orleans headquarters.
We hope that you find the following information
helpful.
Sincerely,
S. Gene Fendler
President
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Thursday,
November 10, 2005
HURRICANE
TAX RELIEF
The Katrina Emergency Tax Relief Act
of 2005 (KETRA), signed by the President on September 23, 2005, is
the first of two planned initiatives dealing with the aftermath of
Katrina. It provides immediate relief to certain businesses located
in disaster areas and those with employees affected by the
hurricane. In addition to the assistance provided by Congress, the
IRS and state governments have temporarily relaxed certain
tax-related compliance rules.
The following is a summary of
important tax relief provisions affecting both individuals and
businesses:
RETIREMENT
PLANS
KETRA enacted several provisions
intended to aid retirement plan participants affected by Hurricane
Katrina, primarily providing for immediate, penalty-free withdrawals
or loans of retirement funds. In addition to the provisions
described below, the IRS has relieved employers by postponing the
minimum funding requirement for qualified retirement plans.
Employers may provide participants of
§401(k) plans, §403(b) annuities, or IRAs "qualified disaster-relief
distributions" up to $100,000. Such distributions will not be
subject to the 10% early withdrawal tax, and although required to be
included in participants’ income, they may be reported ratably over
three years. If during a three-year period, the participant
recontributes any portion of the distribution, the participant is
entitled to claim a refund for taxes previously paid on the amount.
KETRA also permits an employer to make
a qualifying loan under its §401(a) plan, §403(a) or (b) annuity, or
qualified employer plan to a participant who suffers a loss as a
result of Hurricane Katrina. If the loan proceeds do not exceed a
threshold amount, they are tax-free to the participant. In addition,
the due date for certain qualifying loans is delayed for one year if
outstanding at the time of Hurricane Katrina. As a result, employers
must adjust repayments to reflect the delay.
Under certain circumstances, plan
participants who received a distribution from a §401(k) plan, a
§403(b) annuity, or an IRA in order to purchase a home within the
disaster area and who had not yet done so before the hurricane may
recontribute the distribution to the plan. Any amount recontributed
is not includible in income and is not subject to the 10% early
withdrawal tax, therefore entitling participants to refunds.
A bill was recently introduced in
Congress that would address several open issues related to the
hurricane relief loans and distributions from retirement plans. The
bill would allow the Labor Department to waive, suspend, or exempt
certain ERISA requirements. According to a one-year hold harmless
provision contained in the bill, sponsors of affected plans would be
protected from fiduciary liability should they violate the terms of
their plans when implementing the disaster relief in accordance with
any such waiver, suspension, or exemption.
HEALTH
CARE PLANS
The IRS, with the Department of Labor,
has extended the time periods and dates for certain acts relating to
employee benefit plans providing health care coverage that were
affected by Hurricane Katrina. The period from August 29, 2005,
through January 3, 2006, is disregarded in order to provide
participants, beneficiaries, and claimants additional time to comply
with certain deadlines contained in COBRA, HIPAA, and the rules for
making health claims.
EMPLOYER
TAX CREDITS
The Work Opportunity Tax Credit has
been extended to employers hiring those who are unemployed as a
result of Hurricane Katrina. Employers are provided a maximum tax
credit of $2,400 per employee for wages paid to qualified new
workers. The credit is applicable to employees hired within 2 years,
if hired to work in the disaster area, and to employees hired by the
end of 2005, if hired to work outside the disaster area.
An additional tax credit is awarded to
employers who retain their employees after Hurricane Katrina.
Employers are provided a maximum tax credit of $2,400 per employee
for wages paid to retained employees before the end of 2005. The
credit is available for employers whose businesses are located in
the disaster area and who employ no more than an average of 200
employees.
CHARITABLE
GIVING INCENTIVES
KETRA enacted several tax breaks to
encourage businesses and individuals to make charitable
contributions to organizations aiding the victims and areas affected
by Hurricane Katrina.
Upon election, individuals and
businesses making contributions before the end of 2005 to certain
charitable organizations are entitled to deduct the contribution
without regard to the percentage limitations typically applicable.
Corporations may deduct contributions related to Hurricane Katrina
relief in an amount up to the corporation’s taxable income less the
deduction for other charitable contributions. Members of passthrough
entities, as well as other individuals, must separately elect this
provision, which generally entitles each of them to deduct up to the
amount by which the individual’s adjusted gross income exceeds the
deduction for other charitable contributions. This deduction is not
treated as an itemized deduction for purposes of the overall
limitation on itemized deductions, and any portion not permitted to
be deducted may be carried forward and deducted in future years.
Specific charitable deductions are
also provided with respect to contributions of food and book
inventories made before the end of 2005. All businesses donating
food inventory before the end of the year are now entitled to the
same enhanced deductions that apply to such food donations by C
corporations, and greater deductions are also provided to C
corporations contributing books inventories to public schools before
the end of the year.
An additional charitable giving
incentive, which may provide tax benefits to employers, is the
Leave-Sharing Program. Employees may forgo vacation, sick, or
personal leave in exchange for employer contributions of amounts to
charitable organizations providing relief to Hurricane Katrina
victims. The amount of the contribution is not taxable to employees
and is not subject to income or payroll tax withholding. Employers
are entitled to deduct the amount of the contribution as a business
expense.
CASUALTY
LOSSES
Generally, individuals who wish to
deduct personal property losses arising from fire, storm, or other
casualty or theft, which are not compensated by insurance or
otherwise, may only do so to the extent that each casualty or theft
loss exceeds $100 and aggregate losses exceed 10% of the
individual’s adjusted gross income. Under KETRA, if an individual’s
casualty or theft losses are attributable to Hurricane Katrina and
occurred within the disaster area, the $100 and 10% floors do not
apply. Thus, uncompensated personal losses due to Hurricane Katrina
may be deducted without limitation.
Because Hurricane Katrina is a
Presidentially declared disaster, individuals and businesses
suffering disaster losses may deduct the losses in the tax year in
which the disaster occurs or can elect to deduct them in the
immediately preceding tax year. Claiming the casualty loss for the
year before the loss occurred saves taxes immediately, and in some
cases can result in a net operating loss, which may provide a refund
in an earlier year as well.
Companies receiving certain insurance
proceeds, grants from state disaster programs, or other compensation
for property destroyed or condemned as a result of Hurricane Katrina
may be entitled to an extended non-recognition period during which
time gain from receipt of the proceeds need not be realized for tax
purposes. For non-recognition to apply, the company must replace the
property within 2 years of its destruction, or if the replacement
property is used within the disaster area, within 5 years of its
destruction. The replacement property may be any tangible property
of a type held for the productive use in a trade or business. Upon
timely purchase of replacement property, the gain is recognized only
to the extent that the proceeds exceed the cost of the replacement
property.
POSTPONED
FEDERAL FILINGS AND PAYMENTS
Victims of Hurricane Katrina have
until February 28, 2006, to file returns, pay taxes or make deposits
that were due on or after August 29, 2005. This relief is available
in all the counties and parishes listed in the IRS news release IR
2005-91 and applies to the deadlines for income, estate and gift,
excise, and employment taxes. During this extended period, the IRS
will suspend interest and waive applicable penalties.
For taxpayers in the hardest-hit
areas, designated by FEMA as eligible for "individual assistance,"
the deadlines are automatically extended. Taxpayers in areas in
which damage was more isolated, designated by FEMA as "public
assistance areas," must identify themselves as hurricane victims
when filing with the IRS in order for the extensions and suspensions
to apply. Partners, S shareholders, and members of flow-through
limited liability companies do not qualify for automatic extension
merely because their respective entity is an affected taxpayer. Such
persons may request filing extensions, and if they do not receive
their K-1s by the extended due date, the IRS has stated they should
file returns based on a reasonable estimate in good faith of their
shares of items of income, gain, loss, deduction, and credit.
Due to Hurricane Rita, the IRS has
also extended deadlines for filing returns, paying taxes, and
performing other time-sensitive acts to February 28, 2006 for
certain Texas and Louisiana
taxpayers. In addition, the IRS is suspending all "compliance
activities" for those in FEMA "individual assistance" areas and
those outside those areas if they identify themselves as affected by
Hurricane Rita. Interest, late-filing or late-paying penalties, or
deposit penalties will be abated for any tax return, payment, or
deposit with an original or extended due date falling on or after
September 23, 2005. Although the extension does not apply to W-2,
1098, 1099, or 5498 information returns, 1042-S or 8027, or
employment and excise tax deposits, the IRS has authority to waive
or abate penalties for the late filing or payment of these items.
For purposes of determining who is entitled to the automatic
extension and suspension, the same rules applicable to Hurricane
Katrina victims apply to Hurricane Rita victims.
MISCELLANEOUS FEDERAL TAX
RELIEF PROVISIONS
Standard Mileage Increases: As a
result of the dramatic increases in gas prices, the optional
standard mileage rates are increased 8 cents to 48.5 cents a mile
for all business miles driven between September 1 and December 31,
2005.
Waiver of Diesel Fuel Penalties: Due
to shortages of clear diesel fuel, the IRS will waive tax penalties
applicable when dyed diesel fuel is sold for use or used on
highways. In addition, under certain circumstances, the IRS will not
impose the new adulterated fuels penalty for violations of the EPA’s
highway diesel fuel sulfur content regulations.
STATE TAX
RELIEF
The Gulf
Coast states,
as well as many other states across the country, are offering tax
relief to those affected by Hurricane Katrina. Most states have
postponed their deadlines for filing returns and remitting taxes and
have allowed the use of dyed diesel fuel in highway vehicles.
In Louisiana, the Louisiana
Department of Revenue and the Governor have announced several
important tax relief measures. Like many other states, Louisiana has
extended the deadline for filing state tax returns and making tax
payments. The Department has stated that it will follow the federal
treatment of employer-sponsored leave-donation programs, and with
regard to determining Louisiana
income taxes, which are based on a taxpayer’s federal income, it
will respect the federal treatment provided by the IRS and Congress
if there is no specific Louisiana statutory modification.
For more information please contact Robert Angelico at rsangelico@liskow.com or go to www.liskow.com
The
materials in this document are made available by Liskow & Lewis
for informational purposes only and are not legal advice. The
transmission and receipt of information contained in the document do
not form or constitute an attorney-client relationship. Persons
receiving the information in this document should not act upon the
information without seeking professional legal counsel. The
materials in this document may not reflect the most current legal
developments, verdicts or settlements, and should not be considered
an indication of future results.
Nothing
contained in this document was intended or written to be used, or
can be used by or relied upon by any taxpayer for the purpose of
avoiding penalties that may be imposed on such taxpayer under the
Internal Revenue Code of 1986, as amended. No one, without our
express prior written permission, may use any part of this message
relating to any federal tax matter to support the promotion or
marketing of any federal tax transaction(s) or matters or in
promoting, marketing or recommending a partnership or other entity,
investment plan or arrangement to one or more taxpayers. Any
taxpayer should seek advice based upon the taxpayer’s particular
circumstances from an independent tax advisor with respect to any
federal tax matter contained in this
message.
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