Tax Information for Victims of California Wildfires and Other Disasters
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Is My PG&E Settlement Taxable?

Aug 3, 2021 |

If you are receiving money from the PG&E fire settlement the award may be taxable to you.

In general, all income is considered taxable unless Congress says it is not (IRC 61). So, when we look at your PG&E settlement offer, we start with the presumption that all of it is taxable and then we walk through the Internal Revenue Code to try and find ways to make it not taxable.

What the Award is For

First, you have to determine what your award is for. The PG&E Fire Trust has been providing worksheets that detail all the part of your settlement award (e.g. Emotional Distress-Nuisance, Emotional Distress-Zone of Danger, Personal Injury, Real Property, Interest, etc). If you receive a lump sum amount with no details then you can ask your attorney for the detailed worksheets. If there are no worksheets available, you have to go back to the original complaint and allocate the award against the complaint.

Is It Income

Next you have to determine whether each part is includable or excludable from income. Some common settlement elements are:

  • Physical Injury (IRC 104) – payments for physical injury or sickness are excludable from income, but the injury must be physical meaning there was bodily harm.
  • Emotional Distress (IRC 104) – payments for emotional distress are includable in income unless the emotional distress is a result of the physical injury. If you have a physical injury as a result of emotional distress that would still be included in income — the bodily harm must happen first to exclude it.
  • Property Settlements – payments for your real property/contents could be excludable as a disaster relief payment if you rebuild (IRC 139), or you may be able to exclude some of the gain by taking a personal residence exclusion (IRC 121), or you could defer the gain by meeting the requirements of an involuntary conversion (IRC 1033). (Note: Involuntary conversions have specific rules and timelines and the timelines could be tight, especially for Tubbs fire victims).
  • Interest – interest is taxable

Deducting Attorney Fees

Most of the PG&E fire lawsuits are contingent fee lawsuits which means that the attorney fees cannot be excluded from the gross award (Comm v Banks). So, if you receive $100,000 and give 25% to your attorney, you are still taxed on the full $100,000. Further, the Tax Cuts and Jobs Act eliminated the tax deduction (IRC 67) for attorney fees through 2025, so there is no deduction available for the attorney fees on your Federal Income Tax Return (attorney fees are still deductible on the California Return).

Some exceptions are:

  • If part of your award is determined to be non-taxable (e.g. under IRC 139) then a pro rata share of the attorney fees would also be non-deductible on the CA return.
  • If part of your award receives capital gain treatment then a portion of the attorney fees can be added to the basis of the property and thus will be deductible (United States v. Hilton Hotels Corp).

This can be a very complex tax situation thus we recommend you hire a competent professional to help you.

 

 

June & July 2021 Fires declared a disaster

Aug 3, 2021 | , ,

The Governor of California has declared the Dixie, Fly, Tamarack, Lava, and Beckwourth Complex Fires as state disasters. This impacts Alpine, Butte, Lassen, Plumas, and Siskiyou counties.

When a state disaster is declared, it provides a number of tax relief provisions including:

  • Extension of up to 60 days for employers to file their state payroll reports and deposit state payroll taxes without interest or penalties – to request the extension the employer should first file their returns then send a letter to the EDD requesting an extension under section 1111.5 of the California Unemployment Insurance Code. The request can be send to EDD PO Box 826880 Sacramento, CA 94246-0001
  • Extension of up to three months to file and pay taxes or fees to the CDTFA – to request relief you can Submit a Relief Request via your online account or you can mail the relief form (CDTFA-735)
  • Ability to take a disaster loss on the California Return (Note: Disaster losses are not allowed on the Federal Return unless the President declares these fires a disaster. At the time of this writing, these fires are only state declared disasters).

 

What is a Federal Disaster?

Feb 2, 2021 |

What is a Federally Declared Disaster?

I.R.C. §165(i)(5) states that the term “Federally declared disaster’ means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. The term ‘disaster area’ means the area so determined to warrant such assistance.

Declaration Types
There are two types of federal disaster declarations provided for in the Stafford Act: Emergency Declarations and Major Disaster Declarations. Both declaration types authorize the President to provide supplemental federal disaster assistance. However, the event related to the disaster declaration and type and amount of assistance differ:

  • Emergency Declarations: An Emergency Declaration can be declared for any occasion or instance when the President determines federal assistance is needed. Emergency Declarations supplement State and local efforts in providing emergency services, such as the protection of lives, property, public health, and safety, or to lessen or avert the threat of a catastrophe in any part of the United States.
  • Major Declaration: The President can declare a Major Disaster Declaration for any natural event, including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought, or, regardless of cause, fire, flood, or explosion, that the President believes has caused damage of such severity that it is beyond the combined capabilities of state and local governments to respond. A major disaster declaration provides a wide range of federal assistance programs for individuals and public infrastructure, including funds for both emergency and permanent work.

Casualty Loss Types

There are three types of casualty losses: Federal Casualty Losses, Disaster Losses, and Qualified Disaster Losses. All three types of losses refer to federally declared disasters, but the requirements for each loss vary.

  • Federal casualty loss – A federal casualty loss is an individual’s casualty or theft loss of personal-use property that is attributable to a federally declared disaster. The casualty loss must occur in a state receiving a federal disaster declaration. If you suffered a federal casualty loss, you are eligible to claim a casualty loss deduction. If you suffered a casualty or theft loss of personal-use property that was not attributable to a federally declared disaster, it is not a federal casualty loss, and you may not claim a casualty loss deduction unless the exception applies. 
  • Disaster loss –  A disaster loss is a loss that is attributable to a federally declared disaster and that occurs in an area eligible for assistance pursuant to the Presidential declaration. The disaster loss must occur in a county eligible for public or individual assistance (or both). Disaster losses are not limited to individual personal use property and may be claimed for individual business or income-producing property and by corporations, S corporations, and partnerships. If you suffered a disaster loss, you are eligible to claim a casualty loss deduction and to elect to claim the loss in the preceding tax year. 
  • Qualified disaster loss –  A qualified disaster loss is an individual’s casualty or theft loss of personal-use property that is attributable to a major disaster declared by the President under section 401 of the Stafford Act in 2016, as well as from Hurricane Harvey, Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, or from the California wildfires in 2017 and January 2018.

What special tax provisions do I get by being in a federally declared disaster?

  • I.R.C. §1033(h) provides for some of the special rules for property damaged in a federally declared disaster including ability to exclude gain from insurance proceeds for unscheduled personal property and the extension of the replacement period from two years to four years and special rules for what is considered replacement property for trade/business/investment property.

What is a covered disaster area?

A covered disaster area is an area of a federally declared disaster that has been identified by FEMA for Individual Assistance to Households and Families. (IRM 25.16.1)

What is an affected taxpayer?

  • Any individual whose principal residence, for purposes of IRC §1033(h)(4), is located in a covered disaster area;
  • Any business entity or sole proprietor whose principal place of business is located in a covered disaster area;
  • Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and is assisting in a covered disaster area;
  • Any individual whose principal residence, for purposes of IRC §1033(h)(4), or any business entity or sole proprietor whose principal place of business is not located in a covered disaster area but, whose records necessary to meet a tax deadline due within the disaster period are maintained in a covered disaster area;
  • Any estate or trust that has tax records that are necessary to meet a tax deadline for an act due within the disaster period, and that are maintained in a covered disaster area;
  • The spouse of an affected taxpayer, solely with regard to a joint return of the husband and wife;
  • Any individual visiting the covered disaster area who was killed or injured as a result of the disaster; or
  • Any other person determined by the IRS to be affected by a federally declared disaster, within the meaning of IRC §1033(h)(3).

What special tax provisions do I get by being an affected taxpayer in a covered disaster area.

There are a myriad of extensions of time to file and pay (Reg §301.7508A-1). These will be announced by the IRS for the affected taxpayers.

Guidance for how to handle your first casualty return

Jan 27, 2021 | , ,

If this is your first year preparing returns for clients with casualty gain/loss, you may be a bit overwhelmed (I know we certainly were in 2017 when we had hundreds of clients lose their homes). We put together this guide to help you navigate the process. This tax situation is governed mainly by IRC 1033.

Let’s say that Chris and Pat owned a home in Santa Cruz. The home was their personal residence and had no business use. They did not make any improvements to the home. The home was destroyed in a fire in August 2020. The fire was declared a Presidential disaster.

Step 1: Determine the basis for the gain/loss Calculation.

  • C&P purchased the house for $450,000 in 2012. They made no improvements.
  • Determine the Fair Market Value of the property before the disaster and the Fair Market Value of the property after the disaster. The IRS wants appraisals for these figures. In our case, C&P had an appraisal on the property right before the fire due to a refinance. So, the FMV of the property before the fire was $700,000. The Fair Market Value of the property after the fire is $200,000 (the value of the land).
  • Next, determine the smaller of the basis in the property or the Change in Fair Market Value (in our practice over the past few years the basis has always been smaller than the change in FMV).
  • Basis: $450,000
  • Reduction in FMV: $700,000 – $200,000 = $500,000
  • The smaller of those two figures is $450,000.

Step 2: Determine the insurance reimbursement

  • The insurance company will provide a summary sheet showing the insurance proceeds by type of coverage. In our case Chris and Pat received $600,000 of insurance for the dwelling and $300,000 of insurance proceeds for contents (aka personal property). The insurance checks were received in October 2020.

Step 3: Determine the gain/loss

  • For the home the gain is $600,000 – $450,000 cost basis = $150,000 gain on the casualty. The gain is realized in 2020 because they received the check from the insurance company in 2020.
  • For the personal property, no gain is recognized for insurance proceeds for unscheduled personal property in a federally declared disaster. So, C&P get the $300k of contents insurance tax-free. (1033(h)(1)(A)(i))

Step 4: What do do with the gain?

  • C&P have a few options. Since they lived in the home as their personal residence for 2 of the past 5 years they qualify for the Sec 121 homeowner’s exclusion. So they can exclude up to $500,000 of gain.
  • Also, since the fire qualifies as a casualty they can defer paying tax on the gain if they reinvest the insurance proceeds into a new home (1033)(a)(2)). They can do this by buying a new home or rebuilding their home on their lot and using all the proceeds within the prescribed timeframes.
  • Or, if their gain had been bigger, they can use both meaning they could exclude $500k of gain using Sec 121 and then the rest of the gain can be deferred using 1033 (See our article about using both of those here.)
  • Since this was a personal residence in a Presidentially-declared disaster, the property has to be replaced within 4 years from the end of the tax year when gain was realized (1033(h)(1)(B)). C&P received the insurance check in 2020 so their gain year is 2020. They have 4 years from 12/31/2020 to replace the property.

Step 5: How to report on the tax return?

  • If you want to exclude using Sec 121 you just don’t report the gain on the tax return (unless you received a 1099-S).
  • If you want to exclude using Sec 1033 then you just don’t report the gain on the tax return, However we recommend you attach an election statement because this reminds the tax preparer that you have to be sure the taxpayer reinvests the proceeds in the appropriate timeframes to qualify for the 1033 deferral. Then once the property has been replaced, attach another statement showing the replacement property and the gain deferral calculation.

 

Zogg and Glass Fire added to Major Disaster Declaration

Jan 17, 2021 |

Wildfire survivors in three additional California counties are now eligible for federal resources and programs to help rebuild their communities and their lives. California secured the addition of Napa, Shasta and Sonoma counties to the Major Disaster Declaration approved by the Whitehouse last week (DR-4569-CA) which opens up new lines of critical federal assistance for individuals impacted by fires that occurred in those counties in September.

The fires and counties eligible under the recent declaration addition are:

  • Zogg Fire in Shasta County
  • Glass Fire in Sonoma County and Napa County

Relief for Victims of Presidentially-Declared Disasters

Jan 17, 2021 |

Included in the Consolidated Appropriations Act of 2021 was the Taxpayer Certainty and Disaster Relief Act TCDTRA of 2020  which has a number of relief provisions for victims in Presidentially Declared Disaster areas that were declared from 1/1/20 to 2/25/21. The provisions include:

  • Penalty-free retirement plan disaster distributions of up to $100,000 (can be recognized ratably over three years and recontributed within three years). A disaster plan distribution is one to an individual who lives within qualified disaster area who sustained economic loss by reason of the qualified disaster.
  • Recontributions of retirement plan withdrawals made for home purchases that couldn’t be completed due to disaster.
  • Increased loan limits for employer retirement plans that authorize loans.
  • Employee Retention Credit of 40% of $6000 of qualifying wages which equates to a credit of $2,400 per employee for employers impacted by the disaster.
  • Corporations make make a qualified disaster relief contribution up to 100% of taxable income.
  • Low-income housing tax credit expansion
  • For personal casualty losses, you may deduct the loss subject to $500 per casualty floor and you can increase your standard deduction by the loss amount. This means that the loss is not subject to the $100/10% AGI threshold and you do not have to itemize to take it. (This is similar to the treatment received for 2017 Hurricanes and 2017 CA wildfires).

CA may not conform to all of these provisions.

Tax Relief for victims of the early September California Wildfires

Oct 26, 2020 | ,

The IRS announced on Friday that victims of the California wildfires that began on September 4th may receive tax relief from the IRS. Note this is separate relief from that provided for the August wildfires.

Individuals and households who reside or have a business in Fresno, Los Angeles, Madera, Mendocino, Napa, San Bernardino, San Diego, Shasta, Siskiyou, and Sonoma counties qualify for tax relief. but taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.

The tax relief postpones filing and paying deadlines for taxpayers who reside in or have a business in the disaster area. Certain deadlines falling on or after September 4, 2020, and before January 15, 2021, are granted additional time to file through January 15, 2021. This includes individuals and businesses who had a valid extension due to run out on October 15, 2020.

The January 15, 2021 deadline also applies to quarterly estimated income tax payments due on September 15, 2020, and the quarterly payroll and excise tax returns normally due on November 2, 2020, it applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on November 16, 2020, and penalties on payroll and excise tax deposits due on or after September 4, 2020, and before September 21, 2020, will be abated as long as the tax deposits were made by September 21, 2020.

California automatically conforms to Federal Disaster Declarations and the FTB announced its own tax relief on November 5th.

Further, a presidential disaster declaration allows a taxpayer to take a Casualty Loss on their tax return. You are able to take it on the 2020 tax return or amend 2019 to take it. See our earlier articles to get more information on taking the casualty loss deduction.

Trinity County added to Federal Disaster Declaration for August first

Oct 26, 2020 |

The IRS announced that Trinity County has been added to the list of counties under the Federal Disaster Declaration for the August 2020 fires.

Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced that affected taxpayers in certain areas will receive tax relief.

Individuals and households who reside or have a business in Butte, Lake, Lassen, Monterey, Napa, San Mateo, Santa Clara, Santa Cruz, Solano, Sonoma, Tulare, Trinity and Yolo counties qualify for tax relief. but taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.

The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after August 14, 2020, and before December 15, 2020, are postponed to December 15, 2020. This includes individual and business tax filers that had a valid extension to file their 2019 return due to run out on October 15, 2020. The IRS noted, however, that because tax payments related to these 2019 returns were due on July 15, 2020, those payments are not eligible for this relief.

The December 15 deadline applies to the third quarter estimated tax payment due on September 15. It also applies to the quarterly payroll and excise tax returns normally due on November 2. In addition, it applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on November 1.

California automatically follows IRS extended deadlines to file and pay taxes until the date indicated for the specific disaster. At the time of this writing, FTB is working on updating its Disaster Loss page to add to the list of counties affected by the Augus wildfires (Disaster Code 115).

Lassen and Tulare Counties added to the Federal Disaster Declaration for the August 2020 fires

Oct 16, 2020 | ,

The IRS announced that Lassen and Tulare Counties have been added to the list of counties under the Federal Disaster Declaration for the August 2020 fires.

Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced that affected taxpayers in certain areas will receive tax relief.

Individuals and households who reside or have a business in Butte, Lake, Lassen, Monterey, Napa, San Mateo, Santa Clara, Santa Cruz, Solano, Sonoma, Tulare and Yolo counties qualify for tax relief. but taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.

The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after August 14, 2020, and before December 15, 2020, are postponed to December 15, 2020. This includes individual and business tax filers that had a valid extension to file their 2019 return due to run out on October 15, 2020. The IRS noted, however, that because tax payments related to these 2019 returns were due on July 15, 2020, those payments are not eligible for this relief.

The December 15 deadline applies to the third quarter estimated tax payment due on September 15. It also applies to the quarterly payroll and excise tax returns normally due on November 2. In addition, it applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on November 1.

California automatically follows IRS extended deadlines to file and pay taxes until the date indicated for the specific disaster. At the time of this writing, FTB is working on updating its Disaster Loss page to add Santa Clara County to the list of counties affected by the August & September 2020 wildfires (Disaster Code 115).

Presidential Disaster Declaration denied and then APPROVED for early September Fires

Oct 16, 2020 |

Update: Hours after denying a disaster declaration, Gov Newsom made a direct plea to the President and the Disaster Declaration is now APPROVED for the early September fires. The fires part of this declaration are Creek Fire (Fresno & Madera Counties), Bobcat Fire (Los Angeles County), El Dorado Fire (San Bernardino County), Valley Fire (San Diego County), Oak Fire (Mendocino County), Slater Fire (Siskiyou County).

ORIGINAL ARTICLE — Five fires that started in early September have been denied a Presidential Disaster Declaration. This denial means California will not receive special funding to rebuild and taxpayers impacted by those fires are not able to take a federal casualty loss on their tax return.  The fires in this denial are Creek Fire (Fresno & Madera Counties), Bobcat Fire (Los Angeles County), El Dorado Fire (San Bernardino County), Valley Fire (San Diego County), Oak Fire (Mendocino County), Slater Fire (Siskiyou County).

“Confirming that the request for a Major Presidential Disaster Declaration for early September fires has been denied by the federal administration,” Brian Ferguson, spokesman for California Department of Emergency Services said. “The state plans to appeal the decision and believes we have a strong case that California’s request meets the federal requirements for approval. Meantime, Cal OES continues to aggressively pursue other available avenues for reimbursement/support to help individuals and communities impacted by these fires rebuild and recover.”