The IRS has released Announcement 2016-25 related to the Porter Ranch gas leak at the Aliso Canyon natural gas storage facility. The announcement declares that the IRS will not assess tax on reimbursements paid to, or on behalf of, the residents of affected area.
The leak affected an entire community, causing widespread health issues and concerns. Southern California Gas was required to pay for temporary relocation and cleaning costs for area residents from November 19, 2015 through May 31, 2016.
These temporary relocation costs included the cost of renting another home, housewares, appliances, furniture rental, utilities, and moving expenses. Other reimbursements were made for items such as:
- cleaning the interior of the affected homes in line with LA County Department of Public Health protocols
- cleaning residue from the exterior of the homes, exterior furniture, and outdoor fixtures
- air filtration and purification expenses
- automobile detailing
- pet expenses
The amount of these relief payments is significant in most cases. There was concern regarding if the payments would be taxable, resulting in the IRS announcement this week.
The announcement is not good news all around, however. While residents in the affected area can exclude the income, the announcement states that family and friends who received payments for allowing affected residents to stay in their home must include the payments in income. This would be considered rental income, as they were being paid rent to allow another to stay in their home.
The only exception to including these rental payments in income would be IRC Section 280A, which allows taxpayers to exclude rental income for renting your residence for less than 15 days during the taxable year. Since the affected residents were relocated for over six months, it is unlikely those who rented to the affected taxpayers would qualify under this 15 day exception.
If you received this rental income, be sure to report the related expenses. You may be able to deduct a portion of your homeowners insurance, property taxes, mortgage interest, HOA dues, and utilities.
It is unclear how the relief payments will be handled by the California Franchise Tax board, but it is likely that the FTB will follow the IRS guidance.
If you were affected by the Aliso Canyon gas leak, be sure to consult your tax advisor for advice specific to your situation.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]