[StBernard] taxes

[Westley Annis]

Having read the article in the TP about federal taxes, I suspect we will
soon be reading
stories like this;
 
A couple who has EARNED income and paid taxes all their lives, manages to
get a casualty
deduction from the IRS for their 2005 federal income taxes. Let's say they
get a refund check of $15,000. So that's an extra $15k to put back into
repair/replace their damaged home.
 
Now SBA deems them eligible for the low interest, 30 year loan. Let's say
it's $50, 000. So, on top of their flood insurance they have $15k (tax
refund) plus another $50k (loan) which is a total of $65k more than the
flood insurance, which most likely was not enough anyway.
 
And if they aren't low-balled on the house's pre Katrina value such that
when insurance is
deducted, let's pretend that the LRA actually grants them $20k (free money
with some strings attached), then they'll have a grand total of $85k above
the flood insurance proceeds to use on the house.
 
BUT SBA, unless our congressmen get the Stafford Act changed, has to take
that $20k in LRA money to pay off some of the SBA loan. So now the couple's
$85k pot of money is back down to $65k, and they still owe the monthly SBA
note, but now it's a $30k loan. 
 
BUT IT'S NOT OVER YET. IRS steps in and wants the couple to consider that
LRA $20k as taxable gains in the year it is received or offset that $15k tax
refund they got in 2005. So the couple has to pay more taxes in 2007,
assuming that's when they get the $ 20k LRA check. Depending on their tax
bracket, this could be a hefty portion of the $20k, but remember they don't
have the $20k anymore, they had to give it to SBA!  So they have to take a
nice chunk of their remaining $65k to pay the taxes on the LRA money that
they never got to use because it went directly to SBA. Let's say they have
to pay 25 percent tax on that $20k LRA money, so now their kitty is down to
$60k.
 
SO MY QUESTION TO THE CPAs OUT THERE IS THIS- DEAL OR NO DEAL?
 
The couple has two choices
a) don't take the LRA $20k. Keep the 2005 tax refund and the SBA money which
equals $65k. Pay the IRS nothing more than usual income taxes in 2007. 
or
b) take the LRA $20k. The math is $15k (refund) + $50k (SBA loan) + $20k
(LRA grant)-$20k (give LRA money to SBA)-$5k (IRS tax on the LRA money that
went to SBA) equals $60k.
 
It seems there is a break even point somewhere that the extra tax paid to
IRS on taking the LRA money has to be worth it because of the interest not
paid to SBA on the full, original loan amount.  The SBA loans are at 2.687
percent. 
 
Any advice from those well versed in taxes and how we can figure out ahead
of time which is the better deal?
 
ddk (if this sounds complicated, it's because they made it complicated)