The bill adds a new subsection to Internal Revenue Code section 139 to exclude from gross income amounts received (or paid for an owner’s benefit) under State-established catastrophe loss mitigation programs. Eligible sponsors include States, political subdivisions, joint powers authorities, and State-created entities charged with maintaining a market of last resort for property insurance; covered payments must finance property improvements solely to reduce damage from windstorm, earthquake, flood, or wildfire.
The bill also instructs that excluded payments do not increase the property's tax basis and applies retroactively to tax years beginning after December 31, 2021, with Treasury authorized to permit amended returns.
This changes the tax treatment of State mitigation grants and similar programs so recipients won’t face immediate income tax on those amounts. For compliance officers, program designers, and tax counsel, the bill removes a key tax disincentive to State-funded mitigation while creating new documentation and audit questions for the IRS and program administrators—and it has fiscal implications because the exclusion reduces federal receipts and may prompt a wave of retroactive claims.
At a Glance
What It Does
The bill amends IRC §139 to add a new exclusion for 'qualified catastrophe mitigation payments' issued under State-based programs, defined as amounts used to make property improvements solely to reduce damage from wind, earthquake, flood, or wildfire. It also provides that excluded amounts do not increase the owner's basis in the property and makes the change effectively retroactive to taxable years starting after December 31, 2021, with a mechanism for amended returns.
Who It Affects
Owners of residential or other property who receive State mitigation grants or payments, State insurance or mitigation authorities (including joint powers and market-of-last-resort entities), contractors who perform mitigation work, and the IRS/Treasury (which must issue guidance and process retroactive claims).
Why It Matters
By removing income-tax liability on State mitigation funds, the bill lowers a financial barrier to home hardening and could increase participation in state programs. At the same time it narrows future tax bases (lost revenue), adds compliance burdens for verifying 'sole purpose' improvements, and requires administrative work to implement retroactivity.
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What This Bill Actually Does
SB336 tells the tax code not to count certain State-run mitigation payments as taxable income. Specifically, when a State (or a political subdivision, joint powers authority, or a State-created insurance-market entity under state regulatory oversight) pays or funds improvements to a property to reduce future damage from windstorms, earthquakes, floods, or wildfires, the recipient does not include those payments in gross income—so long as the money fits the bill’s definition of a 'qualified catastrophe mitigation payment.' The statutory language covers funds paid directly to owners and funds paid to third parties 'for the benefit of' owners, which keeps common program structures (grants to homeowners, direct contractor payments) within scope.
The bill is explicit that taxpayers do not increase the property's tax basis by the amount excluded. That is a trade-off: recipients get tax-free cash to harden property today but cannot inflate their basis to reduce future gains on sale.
The statute also distinguishes these state-catastrophe payments from other categories already in §139 (it excludes amounts that qualify under previously defined 'qualified disaster mitigation payments'), so Congress intended this as a complementary, not duplicative, exclusion.Practically speaking, implementation will hinge on Treasury/IRS guidance. States and program operators will need to structure payments and recordkeeping so recipients can demonstrate that funds were used 'for the sole purpose' of reducing damage from the listed perils.
Because the bill allows retroactive claims (Treasury must provide an opportunity to claim the exclusion, including by amended return), taxpayers who received qualifying payments in tax years after 2021 can seek refunds or adjustments—this invites a flurry of amended returns and heightens the need for clear instructions on documentation and timing.For program designers, the statutory language widens the set of potential program sponsors to include joint powers authorities and market-of-last-resort entities, which could expand the universe of qualifying payments beyond traditional State grants. For the IRS, the principal operational questions will be how to verify eligible payments without imposing excessive burdens, how to treat mixed-purpose expenditures, and how to process the administrative demand from retroactive filings.
The Five Things You Need to Know
The bill creates new IRC §139(h) to exclude from gross income 'qualified catastrophe mitigation payments' made under programs established by States, subdivisions, joint powers authorities, or State-created market-of-last-resort entities.
Qualifying payments are limited to amounts used to make property improvements whose sole purpose is to reduce damage from windstorm, earthquake, flood, or wildfire.
The new definition intentionally excludes amounts that are already 'qualified disaster mitigation payments,' treating the state-based category as distinct.
Excluded payments do not increase the recipient’s tax basis in the property—rules similar to §139(g)(3) apply.
The exclusion applies to taxable years beginning after December 31, 2021, and the Secretary of the Treasury must provide a process (including amended returns) for taxpayers to claim the exclusion retroactively.
Section-by-Section Breakdown
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Short title: Disaster Mitigation and Tax Parity Act of 2025
This single-paragraph section supplies the Act’s short title. It has no substantive tax effect but frames the bill’s purpose—promoting parity for State mitigation programs within the federal income tax regime.
Adds §139(h): exclusion for State-based catastrophe mitigation payments
This is the operative change: the bill redesignates existing subsection (h) to (i) and inserts a new (h) that excludes from gross income amounts received as 'qualified catastrophe mitigation payments' under programs established by States, political subdivisions, joint powers authorities, or State-created market-of-last-resort entities. It defines qualifying payments by purpose (improvements solely to reduce damage from specified perils) and by recipient (owner of property or payments made for the owner’s benefit). The text requires the improvement goal be the 'sole purpose', which creates a strict-purpose standard rather than a proportional or incidental-use test.
Conforming changes to cross-references in §139
Two short conforming edits insert the new category into existing lists in §139(d) and (i) so that statutory cross-references enumerate 'qualified catastrophe mitigation payments' alongside other §139 exclusions. These changes ensure the new exclusion is integrated into the statute’s internal referencing scheme and reduces drafting ambiguity in downstream references.
Effective date and retroactive claim process
The measure applies to taxable years beginning after December 31, 2021. It directs Treasury to give taxpayers an opportunity to claim the exclusion retroactively, explicitly authorizing amended returns. That direction creates an implementation task for Treasury/IRS—defining the window, required documentation, and processing rules for retroactive claims and potential refunds.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Homeowners and other property owners in high-risk areas: They can accept State mitigation grants or have mitigation work paid for without recognizing the amount as taxable income, improving the net economics of home-hardening projects.
- State program sponsors (States, local governments, joint powers authorities, market-of-last-resort entities): The exclusion makes their mitigation programs more attractive to residents because recipients won’t face an income tax bill, likely increasing take-up and political support.
- Mitigation contractors and local building trades: Removing the tax penalty on grant proceeds should increase demand for hardening work, boosting contractor revenue in affected regions.
- At-risk communities with limited private insurance markets: Entities that exist to ensure a market of last resort can use this tool to expand programs with fewer tax-related objections from recipients.
Who Bears the Cost
- Federal Treasury/IRS: The exclusion reduces federal tax receipts (a tax expenditure) and creates administrative load—issuing guidance, adjudicating eligibility, and processing potentially numerous retroactive amended returns and refunds.
- Taxpayers who later sell their property: Because excluded payments do not increase basis, owners may face higher taxable gains on sale than they would if the excluded amounts had increased basis.
- State and local program administrators: To preserve the tax exclusion for recipients, programs will need to design documentation, certification, and payment mechanisms—adding planning and recordkeeping costs.
- Auditors and compliance shops: The 'sole purpose' standard and third-party payments ('paid for the benefit of') raise verification and audit complexity, increasing compliance costs for both taxpayers and the IRS.
Key Issues
The Core Tension
The bill balances two legitimate goals that pull in opposite directions: incentivizing property-level disaster mitigation by removing tax barriers, versus preserving tax base integrity and administrative simplicity. Encouraging mitigation delivers public benefits (lower future losses, less strain on insurers and aid programs) but the exclusion reduces federal receipts, complicates audits, and forces precise—and potentially contestable—definitions of eligibility and purpose.
The bill leaves several practical questions unresolved that matter for implementation. First, the statutory test—payments used for the 'sole purpose' of reducing specified perils—creates a strict standard that will force administrators and taxpayers to choose between narrowly targeted projects (which are easier to justify) and broader resilience work (which may mix mitigation with repair or amenity upgrades).
Treasury guidance will need to define whether partial-purpose projects qualify and how to allocate a mixed-use expenditure between excluded and taxable amounts.
Second, the statute permits payments 'paid for the benefit of' an owner, which keeps common program structures in play (for example, a state paying a contractor directly). But that language also broadens who must document the transaction for tax purposes: the owner, the program, and possibly the contractor may all face documentation duties during audits.
Third, the no-basis-increase rule limits one commonly overlooked advantage of exclusions: recipients get immediate, tax-free aid but forego a larger basis that would reduce future capital gains—an intertemporal transfer that may make exclusion less valuable to some owners than a basis increase would have been.
Finally, retroactivity poses operational headaches. Treasury must decide the proper mechanics and an evidentiary standard for amended returns, and the IRS will likely see a spike in filings and refund claims.
That creates a timing and staffing challenge and raises the risk of inconsistent outcomes across cases without clear regulatory safe harbors. There’s also a fiscal-policy question: the exclusion achieves a public-good objective (more mitigation) at the cost of federal revenue, and Congress has left no revenue-offset provision in the text.
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