Small Business and Self-Employed
FAQs for Hurricane Victims - Tax Treatment of Grant Proceeds
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(8/13/08) Q: How do reimbursements from state funds to compensate for property damage that are received in a subsequent year affect a homeowner's casualty loss and basis computations?
A: If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer's income tax in the year in which the taxpayer reported the casualty loss deduction. If the subsequent year reimbursement exceeds the amount of the casualty loss deduction, the taxpayer reduces basis in the property by the amount of such excess. In addition, the taxpayer includes such excess in income as gain to the extent it exceeds the remaining basis in the property, unless such gain can be excluded from income or its recognition can be deferred. Also see pages 5-7 of Publication 547, Casualties, Disasters, and Thefts, in the section entitled "Insurance and Other Reimbursements."
However, a recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a grant as reimbursement for the loss, to amend the tax return on which the individual claimed the casualty loss to reduce the loss by the amount of the grant. If the grant received equaled or exceeded the casualty loss the individual deducted, then the casualty loss would be reduced to zero. To qualify, a taxpayer must have claimed a casualty loss to a principal residence, the loss must have resulted from hurricanes Katrina, Rita, or Wilma, and the taxpayer must have received in a later tax year a grant under Public Law 109-148, 109-234, or 110-116, such as a grant from the Road Home program, as reimbursement for the loss. If the taxpayer made a Section 165(i) election to deduct the loss in the previous year, then the previous year is treated as the loss year and the taxpayer may amend the return for the previous year. If the taxpayer carried back the casualty loss to prior taxable years as a net operating loss, then the taxpayer may amend the tax return or returns to which the loss was carried back. A taxpayer who chooses to amend the tax return for the loss year or any carryback years must file the amended return or returns by the later of either: (1) the due date for filing the return for the tax year the taxpayer received the grant; or (2) July 30, 2009. If the reduction of the taxpayer's allowable casualty loss by the amount of the grant results in an underpayment of tax for the loss year or any carryback year, any penalties or interest will be waived, as long as the taxpayer pays the additional tax within one year of filing the amended return or returns reducing the casualty loss deduction.
In October 2008, the IRS released Notice 2008-95, Notice to Address Amended Returns for Hurricane-Related Casualty Losses and Subsequent Grants Reimbursing Such Losses. Notice 2008-95 provides guidelines to homeowners who received federal reimbursement grants stemming from Hurricanes Katrina, Rita or Wilma, including the Louisiana Road Home Grants and the Mississippi Development Authority Hurricane Katrina Homeowner Grants. The Notice explains how eligible taxpayers can amend prior-year returns to reduce the casualty loss deduction previously taken by the amount of the grant, and that under certain conditions taxpayers have one year to pay back any resulting tax due, penalty-free and interest-free. These amended returns must generally be filed by July 30, 2009, and the entire resulting tax due paid within one year from the timely filing of the amended return.
What if an NOL was generated on the original return, would a taxpayer amend all amended returns and Form 1045?
Response: No. If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer's income tax in the tax year in which the taxpayer reported the casualty loss deduction or reduced income tax in a prior year as a result of an NOL caused by a casualty loss deduction. See the preceding question for additional guidance if the subsequent year reimbursement exceeds the amount of the casualty loss deduction. Also see pages 5-7 of Publication 547, Casualties, Disasters, and Thefts, in the section entitled "Insurance and Other Reimbursements."
A homeowner who claimed a casualty loss deduction for damage from hurricane Katrina, Rita, or Wilma, carried back the loss as an NOL to prior taxable years, and received a grant such as a Road Home grant in a later tax year as reimbursement for the loss, may choose to amend the tax returns to which the loss was carried back to reduce the loss by the amount of the grant received, as a result of the change in the tax law described above. See the section on "Amended Returns" in the FAQs for Disaster Victims for more information on this change in the tax law.
Publication 544, Sales and Other Dispositions of Assets
Publication 547, Casualties, Disasters, and Thefts
Publication 551, Basis of Assets
Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma
Notice 2008-95, Notice to Address Amended Returns for Hurricane-Related Casualty Losses and Subsequent Grants Reimbursing Such Losses
In computing the "tax benefit," you are advised to review Publication 525, Taxable and Nontaxable Income