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10.6 Disaster Area Rules

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1 Part 1, Chapter 1: Tax Return Basics & Filing Requirements

1.1 Form 1040 Overview & Structure 1.2 Form 1040-SR for Seniors 1.3 Who Must File (Income Thresholds) 1.4 Filing Deadlines & Extensions (Form 4868) 1.5 Penalties: Failure to File vs. Failure to Pay 1.6 Sources of Tax Information (W-2s, 1099s, K-1s) 1.7 Preparer Due Diligence Requirements 1.8 Amended Returns (Form 1040-X)

2 Part 1, Chapter 2: Filing Status & Dependents

2.1 Single & Married Filing Jointly 2.2 Married Filing Separately 2.3 Head of Household Requirements 2.4 Qualifying Surviving Spouse 2.5 Qualifying Child Test (5 Tests) 2.6 Qualifying Relative Test (4 Tests) 2.7 SSN, ITIN & Residency Status

3 Part 1, Chapter 3: Wages & Employee Compensation

3.1 W-2 Income & Withholding 3.2 Employee vs. Independent Contractor 3.3 1099-NEC, 1099-MISC & 1099-K Reporting 3.4 Fringe Benefits (Taxable vs. Non-Taxable) 3.5 Stock Options (ISO vs. NQSO) 3.6 Special Categories (Clergy, Military, Foreign)

4 Part 1, Chapter 4: Interest, Dividends & Other Income

4.1 Taxable vs. Tax-Exempt Interest 4.2 US Savings Bonds & OID 4.3 Ordinary vs. Qualified Dividends 4.4 Schedule B Requirements 4.5 Rental & Royalty Income Basics 4.6 Alimony, Gambling & Other Income 4.7 Cancelled Debt & Form 1099-C 4.8 Net Operating Loss (NOL)

5 Part 1, Chapter 5: Capital Gains & Property Transactions

5.1 Capital vs. Non-Capital Assets 5.2 Cost Basis Calculation 5.3 Inherited & Gifted Property Basis 5.4 Short-Term vs. Long-Term Gains 5.5 Capital Gains Tax Rates (0%, 15%, 20%) 5.6 Netting & the $3,000 Loss Limit 5.7 Wash Sales & Related Party Rules 5.8 Sale of Primary Residence (Section 121) 5.9 Installment Sales (Form 6252) 5.10 Like-Kind Exchanges (Section 1031)

6 Part 1, Chapter 6: Adjustments to Income

6.1 Educator Expenses & HSA Contributions 6.2 Self-Employment Tax Deduction 6.3 IRA Contributions (Traditional) 6.4 Student Loan Interest Deduction 6.5 Alimony Paid (Pre-2019 Divorces) 6.6 Other Adjustments & New OBBBA Deductions (Tips, Overtime, Auto Loan, Senior Bonus)

7 Part 1, Chapter 7: Deductions (Standard & Itemized)

7.1 Standard Deduction by Filing Status 7.2 Medical & Dental Expenses (7.5% Floor) 7.3 State & Local Taxes (SALT $40K Cap) 7.4 Mortgage Interest Deduction 7.5 Charitable Contributions 7.6 Casualty & Theft Losses 7.7 QBI Deduction (Section 199A)

8 Part 1, Chapter 8: Tax Calculation & Credits

8.1 Tax Tables & Rate Schedules 8.2 Alternative Minimum Tax (AMT) 8.3 Self-Employment Tax Calculation 8.4 Child Tax Credit & Additional CTC 8.5 Earned Income Tax Credit (EITC) 8.6 Education Credits (AOC & LLC) 8.7 Child & Dependent Care Credit 8.8 Other Credits (Saver's, Premium Tax)

9 Part 1, Chapter 9: Retirement Accounts & Social Security

9.1 Traditional vs. Roth IRA 9.2 401(k), 403(b) & TSP Basics 9.3 SEP-IRA & SIMPLE IRA 9.4 Required Minimum Distributions (RMDs) 9.5 Early Withdrawal Penalties & Exceptions 9.6 Social Security Taxation

10 Part 1, Chapter 10: Specialized Individual Returns

10.1 Estate Tax (Form 706) 10.2 Gift Tax (Form 709) 10.3 Foreign Income (Form 2555) 10.4 FBAR & FATCA Reporting 10.5 Farm Income (Schedule F) 10.6 Disaster Area Rules

11 Part 2, Chapter 11: Business Entity Types

11.1 Overview of Entity Types 11.2 State Law vs. Tax Classification 11.3 Entity Selection: Reasonable Comp & QBI 11.4 Form 8832 & Rev. Proc. 2009-41 11.5 LLC Deep Dive: Spouses & EINs 11.6 Changing Status: The 60-Month Rule

12 Part 2, Chapter 12: Starting a Business

12.1 Hobby vs. Business (Profit Motive) 12.2 Employer Identification Number (EIN) 12.3 Tax Year Selection 12.4 Recordkeeping Requirements 12.5 Statute of Limitations 12.6 Related Party Transactions 12.7 Start-Up Costs, Entity Choice & OBBBA Business Changes (2025)

13 Part 2, Chapter 13: Worker Classification & Payroll

13.1 Employee vs. Independent Contractor 13.2 Common Law Test (Behavioral, Financial, Relationship) 13.3 Statutory Employees & Non-Employees 13.4 Form 941 & Payroll Deposits 13.5 Trust Fund Recovery Penalty 13.6 FUTA & Unemployment Taxes

14 Part 2, Chapter 14: Accounting Methods & Income

14.1 Cash vs. Accrual Method 14.2 Hybrid Methods & Changes 14.3 Inventory & COGS 14.4 Gross Receipts & Income Recognition 14.5 Constructive Receipt 14.6 Form 1099 Reporting Requirements 14.7 §163(j) Business Interest Expense Limitation 14.8 §174 Research & Experimental Expenditures

15 Part 2, Chapter 15: Depreciation & Asset Treatment

15.1 MACRS Basics & Recovery Periods 15.2 Mid-Month, Mid-Quarter, Half-Year Conventions 15.3 Section 179 Expense Deduction 15.4 Bonus Depreciation 15.5 Listed Property Rules 15.6 Amortization of Intangibles 15.7 Depletion 15.8 Disposition of Business Assets

16 Part 2, Chapter 16: Business Deductions

16.1 Ordinary & Necessary Test 16.2 Business Travel Expenses 16.3 Business Meals (50% Limitation) 16.4 Business Use of Vehicle 16.5 Home Office Deduction 16.6 Business Interest Limitation (163(j)) 16.7 Business Bad Debts

17 Part 2, Chapter 17: Business Credits & Fringe Benefits

17.1 General Business Credit Overview 17.2 R&D Credit & Disabled Access Credit 17.3 Small Employer Health Insurance Credit 17.4 Fringe Benefit Rules 17.5 Cafeteria Plans (Section 125) 17.6 Achievement Awards & Other Benefits

18 Part 2, Chapter 18: Sole Proprietorships

18.1 Schedule C Overview 18.2 Calculating Net Profit/Loss 18.3 Self-Employment Tax (Schedule SE) 18.4 Estimated Tax Payments 18.5 Hobby Loss Rules

19 Part 2, Chapter 19: Partnerships

19.1 Partnership Formation 19.2 Partner's Basis Calculation 19.3 Form 1065 Overview 19.4 Schedule K-1 (Partner's Share) 19.5 Guaranteed Payments 19.6 Partnership Distributions 19.7 At-Risk & Passive Activity Rules 19.8 Partnership Termination & Liquidation

20 Part 2, Chapter 20: C Corporations

20.1 Form 1120 Overview 20.2 Corporate Tax Rate (21%) & CAMT 20.3 Accumulated Earnings Tax 20.4 Dividends Received Deduction 20.5 Earnings & Profits (E&P) 20.6 Corporate Distributions, Dividends & Stock Redemptions 20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions 20.8 Corporate Liquidation

21 Part 2, Chapter 21: S Corporations

21.1 S Election Requirements (Form 2553) 21.2 Form 1120-S Overview 21.3 Shareholder Basis Calculation 21.4 Reasonable Compensation 21.5 S Corporation Distributions 21.6 Built-In Gains Tax & Termination

22 Part 2, Chapter 22: Specialized Business Returns

22.1 Trusts & Estates (Form 1041) 22.2 Simple vs. Complex Trusts 22.3 Distributable Net Income (DNI) 22.4 Tax-Exempt Organizations (Form 990) 22.5 Retirement Plans (Form 5500) 22.6 Qualified Retirement Plans Overview 22.7 Farm Taxation 22.8 Rental Real Estate Activities

23 Part 3, Chapter 23: Practice Before the IRS

23.1 What is Practice Before the IRS? 23.2 Who Can Practice (Full Rights) 23.3 Limited Practice Rights (AFSP, Unenrolled) 23.4 Special Relationships (Family, Employees) 23.5 PTIN Requirements 23.6 Circular 230 Overview 23.7 Office of Professional Responsibility (OPR)

24 Part 3, Chapter 24: Becoming & Maintaining EA Status

24.1 Two Paths to EA (Exam vs. IRS Experience) 24.2 Application Process (Form 23) 24.3 Background & Compliance Checks 24.4 Renewal Requirements (Form 8554) 24.5 Continuing Education Requirements 24.6 Inactive Status & Termination

25 Part 3, Chapter 25: Practitioner Duties (Circular 230)

25.1 Due Diligence Requirements 25.2 Knowledge of Client's Omission 25.3 Conflict of Interest Rules 25.4 Fee Requirements (Contingent, Unconscionable) 25.5 Advertising & Solicitation Rules 25.6 Tax Return Position Standards 25.7 Written Advice Standards 25.8 Sanctions & Penalties for Violations

26 Part 3, Chapter 26: Power of Attorney & Authorization

26.1 Form 2848 (Power of Attorney) 26.2 CAF (Centralized Authorization File) 26.3 Form 8821 (Tax Information Authorization) 26.4 Third-Party Designee 26.5 Signing Returns for Taxpayers 26.6 Client Confidentiality & Privilege 26.7 Representing Clients in Audits (Examination) 26.8 Appealing IRS Decisions 26.9 Collection Representation

27 Part 3, Chapter 27: Legal Authority & Research

27.1 Hierarchy of Tax Authority 27.2 Internal Revenue Code 27.3 Treasury Regulations 27.4 Revenue Rulings & Procedures 27.5 Court Cases & Precedent 27.6 Statutes of Limitations

28 Part 3, Chapter 28: Specific Representation Issues

28.1 Trust Fund Recovery Penalty (TFRP) 28.2 Innocent Spouse Relief (Form 8857) 28.3 Injured Spouse Allocation (Form 8379) 28.4 Penalty Abatement (FTA & Reasonable Cause) 28.5 Taxpayer Advocate Service (TAS) 28.6 Freedom of Information Act (FOIA)

29 Part 3, Chapter 29: Final Review & Exam Strategy

29.1 Exam Structure & Logistics (2026-2027) 29.2 The "Clock" of Representation (Master Deadlines) 29.3 Ethics vs. Law (Sanctions & Penalties) 29.4 Final Mock Review & Exam Strategy

30 Part 3, Chapter 30: Filing Process & E-File

30.1 E-File Requirements (The "More Than 10 Returns" Rule) 30.2 ERO Responsibilities 30.3 EFIN & Application Process 30.4 Form 8879 (Signature Authorization) 30.5 Record Retention & Data Security (WISP) 30.6 Preparer Penalties (Filing Specific)

10.6 Disaster Area Rules

Key Takeaways Explain This Topic AI

For 2025, personal casualty losses generally require a federal disaster declaration; a separate exception permits offsetting personal casualty gains. Certain state-declared disasters become eligible for the deduction in 2026.

Section 165(i) allows taxpayers to elect to claim a disaster loss on the PRIOR year tax return (deadline: 6 months after the regular due date of the disaster year return)

Qualified disaster distributions from retirement plans are limited to $22,000 per disaster under SECURE 2.0, with 3-year income spreading and repayment options

Principal residences in disaster areas get a 4-year replacement period for casualty gain deferral (vs. 2 years for other property) under IRC Section 1033(h)

Qualified disaster relief payments under Section 139 are tax-free to recipients and not subject to employment taxes

Last updated: October 2026

When the President declares a federal disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, affected taxpayers become eligible for significant tax relief provisions. For EA exam purposes, you must understand the requirements, limitations, and procedures for these special disaster tax rules.

What Qualifies as a Federally Declared Disaster?

A federally declared disaster is any disaster determined by the President to warrant federal assistance. FEMA assigns a disaster declaration number (DR or EM prefix) that must be reported on tax forms.

  • Types of Declarations
  • Major Disaster (DR) : Hurricanes, earthquakes, floods, wildfires, tornadoes
  • Emergency Declaration (EM) : Public health emergencies, terrorist attacks

Key Point: The federal-disaster requirement generally applies to 2025 personal casualty losses, with an exception for offsetting personal casualty gains. Certain state-declared disasters become eligible for deductions in 2026.

  • Personal Casualty Loss Deduction
  • Deduction Eligibility for 2025

For 2025, personal casualty and theft losses generally require a federally declared disaster, except for losses offsetting personal casualty gains. OBBBA expands the deduction to certain state-declared disasters starting in 2026.

Standard Limitations

For personal casualty losses from federally declared disasters, two limitations apply:

  • Limitation Amount Description
  • Per-casualty floor $100 Reduce each casualty loss by $100
  • AGI floor 10% of AGI Total net casualty losses must exceed 10% of AGI
  • Qualified Disaster Loss Exception (Including OBBBA Extension)

Special qualified-disaster-loss relief, extended by OBBBA, applies to qualifying major federal disasters:

OBBBA disaster period: Major disasters declared January 1, 2020–September 2, 2025, with an incident period beginning December 28, 2019–July 4, 2025 and ending by August 3, 2025. Certain earlier disasters also qualify under earlier legislation.

  • Per-casualty reduction : Increased to $500 (instead of $100)
  • 10% AGI floor : WAIVED for qualified disaster losses
  • Itemizing not required : Can claim loss as a standard deduction increase
  • Calculating Casualty Loss

Casualty Loss = Lesser of:

  • Adjusted basis in the property, OR
  • Decrease in fair market value due to the casualty
  • MINUS : Insurance and other reimbursements
  • Section 165(i) Prior Year Election

Taxpayers suffering a disaster loss may elect to claim the loss on the prior year's tax return instead of the disaster year.

Requirements

  • Element Rule
  • Eligible disasters Federally declared disaster area (public or individual assistance)
  • Election deadline 6 months after the regular due date for the disaster year return (without extensions)
  • How to elect File original or amended return for prior year with election statement
  • Scope Election applies to the ENTIRE loss from that disaster
  • Example Timeline (2025 Disaster)

A taxpayer experiences a disaster loss from a federally declared hurricane in October 2025:

  • Disaster year : 2025
  • Prior year election : Can claim on 2024 return
  • Election deadline : October 15, 2026 (6 months after April 15, 2026)
  • When to Use Prior Year Election

Consider electing prior year treatment when:

  • Prior year had higher income (larger deduction benefit)
  • Need immediate cash flow from refund
  • Prior year return not yet filed
  • Extended Filing and Payment Deadlines
  • Deadline Postponements under 2025 Law

The Filing Relief for Natural Disasters Act expanded relief for declarations after July 24, 2025 . Eligible taxpayers affected by federal disasters or qualified state-declared disasters may receive a mandatory 120-day postponement of specified tax deadlines; IRS announcements identify the covered area, dates, and obligations. Do not use the former 60-day period for a declaration covered by the new law. Qualifying state declarations must meet the statutory requirements, including the applicable governor-request rule.

This deadline relief does not make a state-only disaster a deductible personal casualty loss for 2025 . The personal-loss deduction expansion starts in 2026 . IRS disaster postponements are also treated as filing extensions for the refund lookback rule under legislation enacted December 26, 2025 (applicable claims filed after enactment).

2025 Disaster Relief Examples

Disaster Area Type of Extended Deadline

2025 California / Los Angeles County wildfires Various 2024 and 2025 filings/payments postponed (per IRS announcement)

  • 2025 hurricanes / severe storms 2024 and 2025 returns and Q1-Q3 2025 estimated taxes postponed
  • Other 2025 disasters Varies by declaration — check IRS.gov/DisasterTaxRelief
  • What Deadlines Are Extended
  • Individual and business income tax returns
  • Quarterly estimated tax payments
  • Payroll and excise tax deposits
  • Tax-exempt organization returns
  • IRA and HSA contributions (with the return extension)
  • Getting Relief If Not Automatic

If your address of record is not in the disaster area but you were affected:

  • Call the IRS disaster hotline: 1-866-562-5227
  • Self-identify by writing the disaster declaration number on the return
  • Qualified Disaster Distributions (SECURE 2.0)
  • Overview

The SECURE 2.0 Act created permanent rules for tax-advantaged distributions from retirement accounts for disaster victims. These rules are unchanged for 2025.

Key Provisions

  • Feature Rule
  • Maximum distribution $22,000 per disaster (across all plans/IRAs)
  • 10% early withdrawal penalty WAIVED
  • Income spreading Spread over 3 tax years
  • Repayment option Repay within 3 years (treated as rollover)
  • Eligible plans 401(k), 403(b), governmental 457(b), IRAs
  • Who Qualifies

A qualified individual must:

  • Have a principal residence in a qualified disaster area during the incident period
  • Have sustained an economic loss from the disaster
  • Tax Reporting
  • Distributions taxable as ordinary income
  • Can elect to include all income in year of distribution OR spread over 3 years
  • Repayments treated as qualified rollover contributions
  • Report on Form 8915-F
  • Casualty Gain Deferral Rules (Section 1033)

When insurance proceeds exceed the adjusted basis of destroyed property, a casualty gain results. This gain can be deferred if replacement property is purchased within the replacement period.

Replacement Periods

  • Property Type Standard Period Disaster Area Period
  • Principal residence 2 years 4 years
  • Other property 2 years 2 years
  • Period starts from the close of the first tax year in which gain is realized
  • Special Rules for Principal Residence (Section 1033(h))

For homes in federally declared disaster areas:

  • Extended replacement period : 4 years (instead of 2)
  • Content exclusion : Insurance for contents can be combined with structure
  • Gain exclusion interaction : May combine with Section 121 exclusion ($250K/$500K)
  • Requesting Additional Time

If unable to replace within the replacement period:

  • File for extension with IRS before period expires
  • Extensions typically granted for 1 year or less
  • Must show reasonable cause
  • Qualified Disaster Relief Payments (Section 139)
  • Tax-Free Treatment

Qualified disaster relief payments are excluded from gross income if they reimburse or pay for:

  • Covered Expenses Examples
  • Personal, family, living expenses Temporary housing, food, clothing
  • Funeral expenses Burial costs from disaster-related death
  • Repair/replacement of residence Home repairs, furniture replacement
  • Repair/replacement of contents Personal belongings
  • Employer-Provided Payments

Employers can provide tax-free disaster payments to employees:

  • No dollar limit on amount
  • Deductible to employer as business expense
  • Excluded from employee income
  • Not subject to payroll taxes (FICA, FUTA)
  • No pre-established plan required
  • What Does NOT Qualify
  • Not Covered Reason
  • Lost wages/income replacement Not an "expense"
  • Business income losses Must be personal expenses
  • Insurance reimbursements Cannot double-dip
  • Form 4684: Casualties and Thefts
  • Filing Requirements
  • Use separate Form 4684 for each casualty or theft event
  • Check the federally declared disaster box
  • Enter the FEMA disaster declaration number (DR or EM prefix)
  • Documentation Requirements

Maintain records of:

  • Date and type of casualty
  • FEMA disaster declaration number
  • Proof of ownership and adjusted basis
  • Fair market value before and after casualty
  • Insurance reimbursements received or expected
  • Photographs, appraisals, police/fire reports
  • Safe Harbor Methods (Rev. Proc. 2018-08)

For determining casualty loss amounts:

  • Cost Index Method : For personal belongings based on replacement cost
  • Safe Harbor Method : For real property based on contractor estimates

Attach statement identifying which safe harbor method was used.

  • Net Operating Loss Rules
  • General NOL Rules (Post-TCJA)
  • Carrybacks eliminated : NOLs generally cannot be carried back (only forward)
  • 80% limitation : NOL deduction limited to 80% of taxable income
  • Unlimited carryforward : No time limit on using NOL
  • Exception: Farming Losses
  • Farming losses may be carried back 2 years
  • Disaster losses on farm property included
  • Casualty Losses in NOL Calculation

Personal casualty losses from federally declared disasters:

  • Can be included in NOL calculation
  • No 10% AGI floor applies in NOL context
  • OBBBA Senior Bonus Deduction (2025-2028)

An additional $6,000 deduction per eligible individual age 65 or older is available in 2025–2028, subject to SSN, filing-status, and MAGI requirements. It is claimed on Schedule 1-A after AGI and does not reduce AGI; MFS filers are ineligible. Senior disaster victims should remember this deduction stacks on top of the existing $2,000 (Single/HoH) / $1,600 (MFJ/MFS per spouse) age-65 additional standard deduction and is also available to itemizers .

  • Detail Amount / Rule
  • Deduction amount $6,000 per qualifying individual age 65+
  • Years available Tax years 2025-2028 (sunsets Dec 31, 2028)
  • MAGI phase-out begins $75,000 (Single/HoH) / $150,000 (MFJ); 6% of excess
  • Fully phased out at MAGI $175,000 (Single/HoH) / $250,000 (MFJ)
  • Stacks with itemizing? Yes — available whether the taxpayer itemizes or uses standard deduction

Stacks with §139 disaster payments? Yes — §139 payments are excluded; senior bonus reduces taxable income separately

Why this matters in disaster planning: A senior who receives tax-free §139 disaster relief payments AND who itemizes a qualified disaster loss can still claim the OBBBA Senior Bonus — three independent tax benefits in the same year for eligible filers 65+.

EA Exam Tips

2025 deduction rule: Generally require a federal disaster declaration; account for the personal-casualty-gain exception. Qualified state-disaster deduction eligibility begins in 2026.

Section 165(i) deadline : 6 months after the regular due date (without extensions) of the disaster year return — for 2025 disasters, deadline is October 15, 2026.

$22,000 limit per disaster : SECURE 2.0 qualified disaster distributions, not per year.

4 years vs. 2 years : Principal residence in disaster area gets 4-year replacement period; other property gets 2 years.

Section 139 payments : Tax-free to recipient AND payroll-tax-free for employer.

Form 4684 : Always enter the FEMA disaster declaration number for federal disaster losses.

Qualified disaster loss under FDTRA : $500 floor (not $100) and NO 10% AGI floor applies.

OBBBA Senior Bonus : Don't forget the $6,000 additional deduction for filers 65+ in 2025-2028 — usable alongside disaster-loss itemizing AND §139 tax-free relief payments.