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Natural Disasters and Taxes: What You Need to Know

By Marcia Richards Suelzer, MA, JD | June 29, 2012

This spring has seen one of the worst outbreaks of tornadoes and some of the worst Mississippi River flooding in decades. If you are affected by the disaster, taking advantage of the tax code--particularly the casualty loss provisions--may help you regain your financial footing. If you are unscathed (thus far), adding tax awareness to your disaster preparedness planning is a wise move.

Federal Disaster Designation Accelerates Casualty Loss Deductions

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.

Example. On Friday, May 13, 2011, your store is hit by lightning and burns to the ground. This qualifies as a casualty loss. You can claim a loss deduction (provided you meet all the qualifications) on your 2011 tax return, which is due April 16, 2012.

However, if your losses occurred as part of a larger catastrophe (such as tornadoes, a hurricane, mud slides, or flooding) in an area that has been designated as a federally declared disaster area, you have the option of claiming the deduction on your tax return for the preceding year.

To trigger this special tax treatment, the president must declare an area to be eligible for federal assistance as a "major disaster" or "emergency declaration." As of May 16, there have been 41 federal disaster designations and that number is expected to increase substantially as a result of the Mississippi River flooding.

Act Now: If you have sustained losses, check to see the listing of federally declared disaster areas available on the Federal Emergency Management Administration (FEMA) website. If you are in a disaster area, you may be eligible for substantial financial assistance--in addition to tax relief.

If you are in a disaster area, then you will probably want to amend your prior year's return to claim this year's loss as if it had occurred last year. Amending your return is likely to result in a tax refund, which can be in your hands in a matter of weeks. In contrast, depending upon when the disaster occurs, it can be over a year until you can file this year's tax return.

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

The IRS provides Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook, which 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.)

Think Ahead. 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 your 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.

Extensions of Time to File Returns, Pay Taxes

In addition to the special rule regarding when a casualty loss can be claimed, the IRS extends the deadlines for filing returns and paying taxes for those affected by a disaster. Currently, the IRS has provided relief for taxpayer in the following areas:

For these areas, income tax deadlines that fall on or after the event, but before June 30, are postponed to June 30. As a result, residents in these areas will not have to make their quarterly estimated tax payment until June 30. Other extensions are provided for certain types of taxes, so if you are in any of these areas, you should review the relief granted. In general, the IRS will automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. However, if your business is affected by a disaster, but is located elsewhere, you can contact the IRS using the disaster hotline at 1-866-562-5227 to request this tax relief.

Tip. Relief declarations are often updated, so if you don't see your county listed immediately--but you are in a disaster area--check the main listing in a few days. Or, you can contact the IRS disaster hotline for additional information.

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