L.A. Fires: Extensive Tax Relief Available

Multiple tax provisions can assist recovery in Los Angeles

Jan 12, 2025

It has been heartbreaking to see the devastation caused by the fire outbreaks in the Los Angeles area over the last week. Because President Biden declared Los Angeles a federal disaster area, several Internal Revenue Code provisions will facilitate recovery in Los Angeles County by providing tax-related deadline relief and access to financial resources on a tax-preferred basis.

Los Angeles Disaster Declaration

The California fires have been issued a Federal Emergency Management Agency (FEMA) designation of DR-4856-CA with an incident period starting January 7, 2025 (and continuing as of the date of publication) and a declaration date of January 8, 2025. The declaration applies to all of Los Angeles County, California.

Deadline Postponements

The IRS postponed almost all tax-related actions with deadlines on or after January 7, 2025, and before October 15, 2025, to October 15, 2025. The significant returns and payments postponed include:

Almost all 2024 Form 1040s, Form 1041s, Form 1065s, Form 1120-Ss, Form 1120s, and Form 990s (certain 2024 fiscal year returns may not be postponed).
Quarterly payroll and excise tax returns normally due on January 31, April 30, and July 31, 2025.
The 2024 Form 1040 and Form 1120 (calendar-year) payment deadline of April 15, 2025.
The 2024 estimated tax payment due on January 15, 2025, and 2025 estimated tax payments due on April 15, June 16, and September 15, 2025.

Hundreds of other tax-related actions have also been postponed since they are listed in Treas. Reg. §301.7508A-1(c)(1) or Rev. Proc. 2018-58.

The following returns and payments have not been postponed:

The time to file and pay information returns in the W-2, 1094, 1095, 1097, 1098, or 1099 series and Forms 1042-S, 3921, 3922, or 8027.
Payroll and employment tax deposits; however, penalties on payroll and excise tax deposits due on or after January 7, 2025, and before January 22, 2025, will be abated as long as the tax deposits are made by January 22, 2025.

A taxpayer does not have to be affected by the disaster to receive the postponement benefits. Per Treas. Reg. §301.7508A-1(d)(1), the following taxpayers receive postponement relief:

Any individual whose principal residence is located in the disaster area,
Any business entity or sole proprietor whose principal place of business is located in the disaster area,
Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in the disaster area,
Any individual whose principal residence, or any business entity or sole proprietor whose principal place of business is not located in the disaster area but whose records necessary to meet a deadline for a postponed act are maintained in the disaster area,
Any estate or trust that has tax records necessary to meet a deadline for a postponed act and that are maintained in the disaster area,
The spouse of an otherwise postponed taxpayer with regard to their joint return,
Any individual, business entity, or sole proprietorship not located in the disaster area but whose records necessary to meet a deadline for a postponed act are located in the disaster area,
Any individual visiting the disaster area who was killed or injured as a result of the disaster, and
Any other person determined by the IRS to be affected by a federally declared disaster.

California announced a state-level postponement mirroring the IRS postponement.

Casualty Losses

Personal casualty losses (those that arise from fire, storm, shipwreck, or other casualty, or from theft) are only available if they are attributable to a federally declared disaster (see §165(h)(5) concerning this limitation) and not covered by insurance or other reimbursements. In addition, taxpayers can claim disaster-related casualty losses on their federal income tax return for either the year in which the event occurred or the prior year pursuant to §165(i).

This disaster is a so-called “qualified disaster” under §2 of the Federal Disaster Tax Relief Act of 2023 because the disaster was declared before February 10, 2025; therefore, each personal casualty loss is reduced by $500 (and not by $100 plus 10% of adjusted gross income), and the loss amount increases the taxpayer’s standard deduction. This new law was covered in a prior edition of this newsletter.

Qualified Disaster Recovery Distributions

A taxpayer whose principal place of abode is in the disaster area and who suffered any amount of economic loss due to it (including evacuation costs) can take funds out of a retirement account and treat it as a qualified disaster recovery distribution under §72(t)(11).

The maximum amount that can be treated as a qualified disaster recovery distribution is $22,000 per disaster, and it receives three tax benefits:

No 10% additional tax for early withdrawals,

The taxable income is included ratably over three tax years unless the taxpayer elects to include the entire amount in the distribution year, and

The distribution may be repaid within three years from the day after the date of receipt.

For the Los Angeles disaster, a qualifying distribution must be taken no later than July 7, 2025 (179 days after the later of the disaster declaration or starting date).

Qualified Wildfire Relief Payments

§3 of the Federal Disaster Tax Relief Act of 2023 created a new, temporary exclusion from income for qualified wildfire relief payments. The Los Angeles disaster would qualify for this exclusion; however, payment must be received on or before December 31, 2025 to be eligible.

Please look at my prior article on this new exclusion for additional details.

Qualified Disaster Relief Payments

§139 provides a general exclusion for qualified disaster relief payments received by an individual. Any organization, including businesses and state and local governments, can issue a qualified disaster relief payment.

Since the Los Angeles fires are a federally declared disaster, individuals can receive tax-free qualified disaster relief payments under §139(c)(2).

Under §139(b), a qualified disaster relief payment is any amount paid to or for the benefit of an individual not otherwise compensated for by insurance or other means:

To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster,
By a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
If such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.

In Rev. Rul. 2003-12, the IRS ruled the following payments to individuals were excluded under §139:

Grants individuals receive under a state's program to pay or reimburse certain reasonable and necessary medical, temporary housing, or transportation expenses they incur as a result of a flood that was a Presidentially declared disaster, and
Grants employees receive under an employer's program to pay or reimburse certain reasonable and necessary medical, temporary housing, or transportation expenses they incur as a result of a flood that was a Presidentially declared disaster.

Involuntary Conversions

Under §1033, if property (due to its destruction in whole or in part, etc.) is involuntarily converted into property similar or related in service or use to the property so converted, the taxpayer does not recognize gain, and the basis in the original property is generally transferred. If it is converted to money or unsimilar property, the taxpayer's gain is recognized; however, the taxpayer typically has two years to obtain a similar replacement property to avoid any gain recognition.

Under §1033(h)(1), if the taxpayer’s principal residence or any of its contents is located in a disaster area and is involuntarily converted as a result of a federally declared disaster, then:

The taxpayer does not recognize gain from receiving insurance proceeds for personal property that was part of such contents but was not scheduled property for purposes of such insurance, and
The two-year replacement period is extended to four years.

Estimated Tax Penalty Relief

There is no reasonable cause abatement for the §6654 penalty per Treas. Reg. §1.6654-1(a)(1); however, §6654(e)(3) permits the IRS to waive the §6654 penalty if it can determine that the imposition is against equity and good conscience due to casualty, disaster, or other unusual circumstances.

A taxpayer can request relief on Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, and must attach a statement to the return explaining why the taxpayer could not meet the estimated tax requirements and the period for which the taxpayer is requesting a waiver.

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