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October 2005
Congress Passes Hurricane Katrina Tax Relief Legislation 
Congress quickly passed Hurricane Katrina tax relief legislation. Some of the charitable contribution provisions apply to many taxpayers, but the majority of the changes affect employers and residents of the hurricane zone.
Charitable contribution changes: For individuals, the percentage limitations were removed for cash contributions to charities after August 28, 2005 and before January 1, 2006. The amount of the charitable deduction is still limited by the taxpayer's contribution base. Interestingly, eligible contributions are not limited to Katrina relief charities. Cash contributions during this period are excluded from the computation that limits itemized deductions.
Corporate contributions to charities undertaking Katrina relief activities are not limited to 10% of the corporation's taxable income. C corporations, partnerships and sole proprietors may contribute food inventories and claim a charitable contribution deduction of the lesser of fair market value or twice the inventory's cost basis. C corporations may also contribute qualified book inventories and claim a charitable contribution deduction limited to the lesser of fair market value of twice the cost basis of the books. All of these provisions apply to contributions made after August 28, 2005 and before January 1, 2006.
"Good Samaritans" who house Katrina victims for at least 60 days may claim a $500 per resident exemption (limited to $2000). Charitable mileage rules are also modified to allow a taxpayer to claim a deduction for charitable mileage of up to 70% of the business rate if the vehicle is used for Katrina relief activities. If a taxpayer is reimbursed for mileage costs associated with Katrina relief activities, the amount of the reimbursement is excluded from taxable income.
Tax relief provisions for individuals and employers in the hurricane zone casualty and theft losses associated with Hurricane Katrina are fully deductible, both the 10% AGI limitation and the $100 floor are suspended. According to the Joint Committee on Taxation, these loses may be claimed without limitation on a 2004 return under Section 165(i). The two-year replacement period for involuntarily converted property is extended to five years for property located in the hurricane zone. To identify what areas are included in the hurricane zone refer to http://www.irs.gov/newsroom/article/0,,id=148284,00.html .
Individuals whose debt was cancelled because of damage sustained by Katrina are not required to include the cancelled debt in taxable income.
Congress waived for one year the 10% early withdrawal tax on qualified retirement plan distributions of up to $100,000 for residents of the hurricane zone. These distributions are included in taxable income ratably over a three year period. To avoid such taxation, recipients are authorized to make rollover contributions over the same three year period to return the withdrawn funds to their qualified retirement plan or IRA. First-time homebuyers who previously withdrew money from qualified plans to purchase homes, and such transactions do not close because of the hurricane, may re-contribute these sums to their plans. Such deposits must be completed within six months following the date of the disaster. The $50,000 / 50 % limitation on qualified plan loans is increased to $100,000 / 100 % for individuals who sustained loses in the Katrina disaster area. Existing plan loans to Katrina affected employees will not be held to be in default due to late payments. Payments due between August 25, 2005 and December 31, 2006 can be deferred for up to one year without violating the terms and conditions of Section 72(p). The DOL has acknowledged the need to make the parallel changes to its regulations to reflect these changes and has agreed to take such action promptly.
Plans are authorized to make these distributions without having to amend the plan. Such conforming amendments must, however, be completed by the end of 2006.
Employers in the Katrina zone may qualify for a 40% wage credit, subject to many restrictions. Katrina survivors are also considered eligible employees for purposes of the work opportunity credit. Fair Value Disclosure Reminder
Submitted by: Denise Miles, CPA
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , requires all entities to disclose the fair value of all financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. If estimating fair value is not practicable, the Statement requires disclosure of descriptive information pertinent to estimating the value of a financial instrument.
Statement No. 107 applies to all entities but is optional for those entities that meet all of the criteria in FASB Statement No. 126, Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities :
- The entity is a nonpublic entity;
- The entity's total assets are less than $100 million on the date of the financial statements; and
- The entity has no instrument that, in whole or in part, is accounted for as a derivative instrument under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, other than commitments related to the origination of mortgage loans to be held for sale during the reporting period.
Although a company may meet the first two criteria required for exemption from the disclosures about financial instruments (i.e., nonpublic entity with assets less than $100 million), holding or issuing a derivative triggers the required application of Statement No. 107. If the company has held or issued any derivative during the reporting period, the disclosures required by Statement No. 107 must be made for all financial instruments, not just the derivatives.
The three criteria discussed above are to be applied to the most recent year presented in comparative financial statements. If disclosures are not required in the current period, the disclosures for previous years may be omitted if financial statements for those years are presented for comparative purposes. If disclosures are required in the current period, disclosures about the fair value of financial instruments required by Statement No. 107 that have not yet been reported previously need not be included in financial statements that are presented for comparative purposes.
For more information on the above topics, please contact Denise Miles at 256-533-1720 or email at dmiles@beasonnalley.com.
Coffee Talk
Don Nalley spoke at the Annual Meeting for Compass Bank on Transitioning Your Business.
Don Nalley attended the University of Alabama Board of Visitors meeting in Birmingham, Alabama.
Mike Woeber, Matt Capone and Cindy Hill attended the Tax Workshop on the New Manufacturer Producers in Birmingham, Alabama and sponsored by Alabama Society of CPA's.
Denise Miles and Paige Nix attended the RSM McGladrey A&A Roundtable in Nashville, Tennessee.
Don Nalley was elected to the University of Alabama Huntsville School of Business Board of Advisors.
Welcome to Keisha Gilmore, Melanie Dunn and Jennifer Taylor. They will be working in the Audit Department.
Melissa Anderson spoke to the Alabama Society of Women Accountants and gave a GAAP Update presentation on September 23rd at the Holiday Inn Select Hotel (previously the Hilton).
Stephanie Kingsford spoke to the Alabama Society of Women Accountants and gave a Tax Update presentation on September 23rd at the Holiday Inn Select Hotel (previously the Hilton). Related Information:
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