President Trump Declares Disaster Declaration for Mid-Michigan

Governor Rick Snyder’s request for disaster declaration was approved by President Trump on Wednesday, August 2, 2017. Four counties, Bay, Gladwin, Isabella and Midland, have been included in the declaration. The declaration is aimed at providing relief via individual assistance and hazard mitigation assistance for local governments. The federal declaration also makes other forms of assistance available and potentially improves tax situations for individuals and businesses.

Assistance for Individuals and Businesses

Residents and businesses of the affected counties are now eligible to utilize low interest loans through the SBA. The assistance includes both physical damage and economic injury loans. Loan applications are due by October 2, 2017, for physical damage loans and May 2, 2018, for economic injury loans. Additionally, the SBA will accept applications for economic injury loans for contiguous counties: Arenac, Clare, Gratiot, Mecosta, Montcalm, Ogemaw, Osceola, Roscommon, Saginaw, and Tuscola County. For more information on the loan application process and details visit https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/disaster-loans.

Another form of assistance available through FEMA is the use of federal dollars to provide direct individual assistance. As of August 4, 2017, the federal government has not determined what amount of assistance will be provided. FEMA’s website is updated every 24 hours and will provide more details as determinations are made: https://www.fema.gov/disaster/4326.

Tax Implications

Tax due dates for individuals and businesses in the affected area are extended as a result of the disaster declaration. Certain payments or returns that were due falling on or after June 22, 2017, and before October 31, 2017, are granted additional time to file and pay through October 31, 2017.

Prior to the declaration, casualty losses could only be claimed in the year in which they occurred. Federal disaster area status allows residents to claim a casualty loss in the year it occurred or the prior year. This improves the possibility of favorable tax treatment and can produce a quick refund when funds are needed most.

A loss is determined by subtracting insurance proceeds, reimbursements, and free federal monetary assistance from the lower of the decrease in the fair market value (FMV) of the property due to the casualty, or the adjusted basis of the property prior to the event. It is important to note that disaster loans provided by the SBA, or any other agency, will not affect the determination of a casualty loss.

A decrease in fair market value of a property is determined by comparing the value of the property immediately before and after the event. Generally, an appraisal will be necessary to determine the decrease in value. Adjusted basis of a property is calculated by starting with the original price of the property plus capital expenditures, minus depreciation. Casualty loss deductions can only be claimed in excess of 10% of Adjusted Gross Income (AGI).

Example

A taxpayer’s home was purchased for $100,000 several years ago. The FMV of the home prior to the flood in June was $150,000 and immediately after the flood was $110,000. The decrease in FMV is $40,000 and the adjusted basis is $100,000. There was also a considerable amount of damage to furniture in the taxpayer’s home totaling $5,000. Furthermore, the insurance company is providing $10,000 for the loss. The loss is determined as: $40,000 (lower of FMV decrease or adjusted basis) plus 5,000 in furniture losses minus the $10,000 in insurance payments for a total of $35,000. The taxpayer has an AGI of $75,000. This means that the taxpayer can claim a casualty loss for $35,000 minus the $7,500 income limitation ($75,000 x 10%) or $27,500.

The federal disaster declaration may change the situation for many people. If you have questions about casualty losses, finding more information on SBA loans or other assistance, please contact our office.