This is an brief update on significant tax-related issues that may affect you and your business in the wake of Hurricane Katrina, including:
 

·        The extension of many federal and state filing and payment deadlines until January 3, 2006,

·        Options for employers that want to provide financial relief to their employees affected by Hurricane Katrina, and

·        Other new and existing tax provisions that may lower your tax burden

Deadline Extensions

            The IRS has extended the due date to file any returns, pay any taxes and make any deposits that would otherwise be due on or after August 29, 2005 until January 3, 2006 for the following 52 Mississippi counties:

Adams, Amite, Attala, Chickasaw, Choctaw, Claiborne, Clarke, Clay, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Itawamba, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lee, Lincoln, Lowndes, Madison, Marion, Monroe, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Webster, Wilkinson, and Winston;

 For example, the September 15, 2005 estimated tax deadline, the October 17, 2005 deadline for individuals who received a second extension for their 1040 and the October 31 deadline for federal employment and excise taxes are all extended until January 3, 2006.  When filing a return that qualifies for these IRS extensions, taxpayers should write “Hurricane Katrina” in red ink at the top of the return (for IRS Form 5500, however, see the form’s instructions).

             The Mississippi State Tax Commission ("MSTC") has announced that it will follow the IRS's lead in extending certain filing and payment deadlines.  The extensions will apply to any income tax return or tax payment with an original or extended due date on or after Aug. 29, 2005.  The extension does not apply to payments on pre-existing tax liabilities.  Included in the extension are the Sept. 15 due date for estimated taxes and for calendar-year corporate returns with automatic extensions; the Oct. 17 deadline for individuals who received a second extension for filing their individual income tax returns; and the filing deadline for monthly and quarterly withholding tax returns.   Similar to the relief announced by the IRS, the MSTC also work with any taxpayer who resides outside of the area affected by Hurricane Katrina but whose books, records or tax professional are located in the relief area.

 Employer Sponsored Assistance Program

             Many employers are interested in providing financial assistance to their employees affected by Hurricane Katrina.  If possible, these programs should be structured so the payments are tax-free to the employee and tax-deductible by the employer.

             The following employer assistance is generally not included in an employee’s income to the extent the payments are “reasonable and necessary” as a result of a qualified disaster and not otherwise covered by insurance:
 

1. Personal, family or living expenses, and

2. Repair or rehabilitation of a personal residence or repair or replacement of its contents.

             Many employers provide financial assistance through a charitable foundation to ensure they will receive a deduction for their payments and to provide an incentive for others to make a donation to the fund.  The IRS can retroactively grant tax exemption to a foundation if the application is submitted within 27 months of commencement, so employers can immediately provide benefits to its employees as soon as the foundation is formed.

             In order to qualify for tax-exempt status, the foundation must make a specific assessment that a recipient of aid is financially or otherwise in need.  Charity funds cannot be distributed to individuals solely because the individuals are the victims of a disaster - each individual case must be objectively assessed.  Some items and services, however, may be provided without an evaluation (e.g., meals and counseling). 

 Retroactive Disaster Area Deductions

             Subject to certain limitations, all taxpayers generally receive a deduction for a loss arising from, “fire, storm . . . other casualty, or from theft.”  For losses sustained in a Presidentially declared disaster area, taxpayers can elect to take the loss into account in the prior year.  This rule allow taxpayers to deduct losses sustained during 2005 by Hurricane Katrina on their 2004 tax return (or on an amended 2004 tax return) and immediately receive a refund (or reduced tax burden).

 Leave-Based Donation Programs

             Under a leave-based donation program, employees forgo vacation, sick or personal leave time in exchange for an employer’s donation of cash to a charitable organization.  Provided the amounts are paid to a charitable organization for relief of Hurricane Katrina victims and are paid prior to January 1, 2007, the amounts will not be included in the gross income or wages of the donating employee.  The donating employees are not allowed a charitable deduction, but the employer is generally allowed a deduction.

 Purchases with Federal or Charity Debit Cards

             The MSTC has announced that purchases made with debit cards provided by the federal government and the Red Cross or other charitable organizations are subject to Mississippi sales tax.

 Federal Reprieve from Compliance

             The IRS has suspended many tax-collection activities for a period of at least 60 days.

 Pending Federal Legislation

             Senate Finance Committee leaders unveiled a 17-point tax package on September 12, 2005 intended to provide cash to the victims of Hurricane Katrina and tax incentives to those who help them gain employment and housing.  The proposed package includes, among other items:
 

·        Penalty-free early withdrawals from retirement plans for Katrina victims,

·        An exemption for debt discharged by commercial lenders when the forgiveness is in response to damage suffered during the hurricane (discharged debt is normally taxable),

·        Up to a $2,400 tax credit to employers per qualified new worker,

·        A 40% tax credit for up to $6,000 in wages paid before the end of 2005 by employers located in the disaster area,

·        A housing deduction of $3,200 for those who house persons dislocated as a result of the storm for at least 60 days, and

·        An additional $500 exemption per dislocated person, capped at $2,000.

Members of Congress have indicated that this bill will be expedited through the legislative process.

For more information, please contact either David Webb or Delbert Hosemann:
Phelps Dunbar, LLP
111 East Capitol Street,
Suite 600
Jackson, Mississippi
39201-2122
(601) 352-2300
Fax (601) 360-9777

or Greg Pirkle:
Phelps Dunbar, LLP
One Mississippi Plaza
Seventh Floor
Tupelo, Mississippi 38804
(662) 842-7907
Fax (662) 842-3873

All rights reserved, this information is published as a service to clients and friends of Phelps Dunbar LLP, and should not be construed as legal or professional advice or as opinion on specific fact.
 

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