Disasters and Taxes: What You Need to Know After the Crisis Passes
When disaster strikes (and we hope it never does), a key step on the road to recovery is regaining your financial footing. Taking advantage of the tax code—particularly the casualty loss provisions—may help. In addition, the IRS may extend filing deadlines and provide other forms of relief to those in disaster areas.
If you are unscathed thus far, adding tax awareness to your disaster preparedness planning is a wise move. The IRS provides a webpage with tips and links to resources to help you be disaster-ready.
Federal Disaster Designation Lets You Claim the Loss Immediately
If your property is completely, or partially, destroyed in a sudden, unexpected, or unusual event, you may be eligible to claim a casualty loss deduction. Assuming that you meet all the conditions, you can deduct this loss in the year it occurs. For complete information, see our discussion on the requirements for claiming a casualty loss deduction.
During the summer of 2013, Gabriela's store is hit by lightning and burns to the ground. This qualifies as a casualty loss. She can claim a loss deduction (provided she meets all the qualifications) on her 2013 tax return, which is due April 15, 2014.
However, if your losses occurred as part of a larger catastrophe (such as tornadoes, a hurricane, mud slides, or flooding) and your area is designated as a federally declared disaster area, you can amend your prior year's return and claim the casualty loss deduction in that year. If you have lost your records in the disaster, the IRS can help. See our companion story, "Get Your Prior Year's Tax Information from the IRS" for advice on how to obtain your tax information.
Assume that the lightening that struck Gabriela's store occurred as part of widespread destruction associated with an outbreak of damaging storms and tornados. The area is designated as a federal disaster area. This means that Gabriela has the option of amending her 2012 return to claim the loss, or, claiming it on her 2013 tax return.
She opts to amend her return. She files her 2012 amended return in early September, 2013, and receives the refund generated by the loss in mid-October, 2013. In contrast, if she had waited to claim the loss on her 2013 return, she would not have seen a refund until 2014.
This is extremely advantageous because you can get a refund in your hands within weeks.
Remember, to trigger this special tax treatment, the President must declare an area to be eligible for federal assistance, e.g., as a "major disaster" or "emergency declaration." If you have sustained losses, check to see the listing of federally declared disaster areas available on the Federal Emergency Management Administration (FEMA) website. Also, bear in mind that if you are in a disaster area, you may be eligible for substantial financial assistance, in addition to tax relief.
Establishing Your Losses. In order to claim your casualty losses—whether on this year's return or on an amended return—you need establish the amount of the loss. In order to do this, you need to:
- list all of your property that was destroyed or damaged;
- determine the original cost (or adjusted basis) of each item;
- determine the fair market value of the property right before disaster struck
- determine what the property is worth now, after the disaster
- calculate the amount of insurance or other reimbursements that you have received or expect to receive
While "you don't know what you've got 'til it's gone" is a fine song lyric, it's not a good policy for business owners. Having an inventory of your property before disaster strikes helps ensure that you can make timely—and complete—insurance claims and support casualty losses that you claim on your tax returns. If you are fortunate and never have to file an insurance claim or casualty loss, the inventory can help jog your memory regarding business expense deductions or help support your valuation claims if you dispose of assets.
The IRS provides Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook. This workbook enables you to record all your assets in various categories, from building components (heating system) to office supplies (paper clips). (You can inventory personal-use property using Publication 584.)
Extensions of Time to File Returns, Pay Taxes
In addition to the casualty loss provisions, taxpayers affected by a disaster may receive an extension or postponement of the deadlines for filing returns and paying taxes. Extension-type of relief is separate from the casualty loss rules, and can also be very helpful if disaster strikes, especially if the disaster occurs near a filing deadline.