Your Disaster-Related Tax Questions Answered

Postponements, qualified disasters, qualified disaster relief payments, and qualified disaster recovery distributions

Vast swaths of the United States (and some areas outside of the United States) are subject to special tax rules due to being within declared disaster areas. In the last few days, I have received many questions on disaster-related topics, and below are the answers to these frequently asked questions.

Has the IRS announced postponed deadlines for a particular disaster?

The IRS has a website where they accumulate all announced disaster postponements; I recommend you bookmark this site as a useful reference.

Even if the IRS has not made an announcement, §7508A(d) provides an automatic 60-day postponement regardless of any IRS announcement beginning on the earliest declaration date for a major disaster for which the President provides financial assistance under §408 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5174). This automatic postponement applies to six specific acts for qualified taxpayers defined in §7508A(d)(2):

1. Filing any return of income, estate, gift, employment, or excise tax,

2. Payment of any income, estate, gift, employment, or excise tax or any installment thereof or of any other liability to the United States in respect thereof,

3. Filing a petition with the Tax Court, or filing a notice of appeal from a decision of the Tax Court,

4. Allowance of a credit or refund of any tax,

5. Filing a claim for credit or refund of any tax, and

6. Bringing suit upon any such claim for credit or refund.

The above actions are postponed for 60 days even if later IRS guidance does not explicitly postpone these actions further; see Abdo and Farah v. Comm., 162 T.C. No. 7 (2024).

How does a taxpayer determine if a particular action is postponed?

If the IRS issues guidance for a particular disaster, it lists the postponed actions and the postponement period. The action’s deadline had to fall within the announced postponement period for that action to be postponed.

Reviewing the state-specific guidance instead of the generic IRS press release is best. For example, on October 1, 2024, the IRS announced disaster postponements related to Hurricane Helene in Alabama, Georgia, North Carolina, South Carolina, Florida, Tennessee, and Virginia in IR-2024-253.

However, reviewing VA-2024-01 provides essential details for Virginia taxpayers. The postponement applies to the Galax City, Grayson, Smyth, Tazewell, Washington, Wise, and Wythe counties and provides the following information on postponed actions:

Almost all disaster postponement guidance postpones the actions listed in Treas. Reg. §301.7508A-1(c)(1) and Rev. Proc. 2018-58. Rev. Proc. 2018-58 is 139 pages long and lists hundreds of tax-related actions that are generally postponed.

However, if the IRS does not issue specific guidance for a disaster, there is only a 60-day postponement as described previously, and it only applies to those particular acts.

Does a taxpayer receive a postponement if their tax professional is in the postponement area?

There is a common misconception that a tax professional being located in a postponed disaster area automatically grants a postponement to their clients. This is only true if the IRS grants that specific relief in its specific disaster guidance; for example, in the Israel postponements (Notice 2024-72 and Notice 2023-71), the IRS included in the relief

Any individual, business entity or sole proprietor, or estate or trust whose tax return preparer or records necessary to meet a deadline for postponed acts are located in the covered area.

Almost all other disaster guidance does not include this language; however, under Treas. Reg. §301.7508A-1(d)(1)(vii), an affected taxpayer includes

Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a deadline for an act specified in paragraph (c) of this section are located in the covered disaster area;

The IRS has a process where tax professionals can provide a bulk request for disaster relief for their clients; however, the IRS’s website is clear it is not for every client:

Where the IRS has granted a postponement of time to file returns and make payments in response to a federally declared disaster, practitioners located in the covered disaster area, who maintain records necessary to meet a filing or payment deadline for taxpayers located outside the disaster area, may elect to contact the IRS to identify such clients. (emphasis added)

What happens if a postponed deadline falls within a second postponement period?

Suppose the last day to perform an act under a postponement falls during another subsequent postponement period. In that case, the original act is further postponed until the last date in the subsequent postponement period.

For example, the following language is in Notice 2024-72:

A U.S. citizen living in Israel typically had until June 15, 2024 to file their 2023 Form 1040 and pay any balance due. Under Notice 2023-71, the filing and payment deadline was postponed to October 7, 2024. Since October 7, 2024 falls within the Notice 2024-72 postponement period, a U.S. citizen living in Israel now has until September 30, 2025, to file their 2023 Form 1040 and pay any balance due.

Can a taxpayer get special retirement distribution treatments in a disaster zone?

A taxpayer can take a §72(t)(11) qualified disaster recovery distribution from a retirement account of up to $22,000 per disaster. It is not subject to the 10% early withdrawal penalty and the income inclusion is spread equally over three tax years (unless that taxpayer elects to include it all in one year). The taxpayer can choose to repay the distribution within three years as well.

The distribution must generally be taken within 180 days of the later of the first day of the incident period or the disaster declaration date, and the taxpayer must have had some type of economic loss to qualify for the special distribution treatment.

The IRS’s website has additional information on qualified disaster recovery distributions; the distribution is reported on Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments.

Can a business owner make tax-free relief payments to workers and deduct those payments as business expenses?

I have seen several social media posts stating that a business owner can provide tax-free disaster relief payments to their workers and then deduct those payments as business expenses. If an employer offers financial assistance to a worker due to a declared disaster, two separate determinations must be made:

1. Is the payment excluded from the worker’s income under §139 as a qualified disaster recovery payment?

2. Is the payment deductible as a §162 ordinary and necessary expense to the business?

§139(a) provides a general exclusion for qualified disaster relief payments received by an individual. Any organization can issue the payment, including businesses and state and local governments. Under §139(b), a qualified disaster relief payment is any amount paid to or for the benefit of an individual:

• 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 to promote the general welfare.

It is important to note that the §139(b) flush language limits the exclusion to payments for expenses not otherwise compensated for by insurance or otherwise.

Under §139(c), a qualified disaster means

• A disaster that results from a terroristic or military action (defined in §692(c)(2)),

• A federally declared disaster (defined by §165(i)(5)(A)),

• A disaster that results from an accident involving a common carrier, or from any other event, that is determined by the Secretary to be of a catastrophic nature, or

• With respect to amounts described in subsection (b)(4), a disaster that is determined by an applicable Federal, State, or local authority (as determined by the Secretary) to warrant assistance from the Federal, State, or local government or agency or instrumentality thereof.

A §139 excluded payment is also not subject to self-employment tax or employment taxes due to §139(d).

In Rev. Rul. 2003-12, the IRS ruled that grants that 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 were excluded from income under §139(a).

Is a disaster loss a “qualified disaster loss” allowing the taxpayer to bypass the 10% of adjusted gross income floor on a casualty loss?

Personal casualty losses in a disaster area are only deductible to the extent they exceed 10% of the taxpayer’s adjusted gross income for that tax year. However, if the disaster loss is a “qualified disaster loss,” the 10% floor is not applicable and the taxpayer does not need to itemize deductions to claim the loss.

A disaster loss is not a qualified disaster loss unless Congress passes a law explicitly designating it as such. Congress has not taken this action concerning a disaster since the Taxpayer Certainty and Disaster Tax Relief Act of 2020; in that law, Congress designated disasters declared between January 1, 2020, and February 25, 2021, as qualified disaster losses. There have been no other designations since that date.

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