5 Tax Breaks to Help See You through a Storm or Other Devastating Event
by BarbaraWeltman, Guest Blogger
- Created: September 12, 2012, 9:42 am
Every year, countless businesses across the country experience hurricanes, blizzards, power outages, fires, tornados, and other events that can temporarily disrupt activities and, in some cases, put them out of business. For instance, in *2010, there were 98,000 fires to nonresidential structures, resulting in $2.6 billion in property damage. Hopefully, business owners are smart enough to carry adequate insurance to offset their property losses and have business recovery plans that enable them to function again. But despite all the planning, devastating events can still cause significant financial hardship to businesses. Fortunately, tax rules can help soften the financial blow.
1. Take a tax deduction for property damage
If insurance does not cover the damage or destruction to your business property, you can take a tax deduction against your business income. The write-off is the lower of decline in the value of the property as a result of the casualty event, such as a storm or fire, or the property’s adjusted basis. The loss is reduced by any insurance proceeds or other reimbursements you receive. If you experience a flood to your workspace and you’ve fully written off the cost of a water-logged computer (by claiming expensing or depreciation for the purchase price), you don’t get any casualty loss deduction because your adjusted basis in the property is zero.
Casualty loss deductions for non-business (personal) property are subject to two limitations: (1) a reduction of $100 per casualty event and (2) a 10%-of-adjusted gross income floor before which any deduction can be claimed. There are no limitations for losses to business property.
Use a special IRS workbook to figure your losses.
2. Get a tax refund by reporting a disaster loss on the prior year’s return
If the loss occurred in an area declared eligible for relief from the Federal Emergency Disaster Agency (FEMA), then your casualty event has become a disaster loss. This gives you the option to deduct the loss on the return for the year of the event or on the return for the prior year. Taking the loss on a return for the prior year generates a tax refund that can be used to help you rebuild your business. If you’ve already filed the previous year’s tax return, simply file an amended return to report the loss.
Find a list of disaster areas from FEMA.
3. Defer your gain from insurance proceeds
How can a casualty loss produce a tax gain? This occurs when the insurance proceeds that you receive are greater than the adjusted basis of the property to which they relate. If, for example, you recover $1,500 for a computer that now has a zero basis (explained earlier), you have a $1,500 gain. This gain is not taxed now if you obtain replacement property within a set replacement period.
Find out more about involuntary conversions from the IRS.
4. Take advantage of extensions for filing and other tax chores
When disaster strikes, the IRS may grant more time for businesses in affected areas to complete certain tax obligations, such as filing income tax returns. For example, in the wake of Hurricane Isaac, the IRS said that businesses as well as individuals in certain locations have until January 11, 2013, to file their 2011 income tax returns if they had previously obtained extensions of time to file (to September 17, 2012, for corporations and partnerships; to October 15, 2012, for sole proprietors and owners of partnerships, limited liability companies, and S corporations). The same extension applies for paying estimated taxes for the third quarter of 2012 which is otherwise due on September 17.
While the IRS is not authorized to extend the deadline for employers to deposit payroll taxes, or file employment and excise tax returns, it has said that it will abate (waive) any interest and penalties for actions that were normally due on or after August 26 and before September 10, if the deposits are made by September 10.
5. Reconstruct your tax records
Normally, you must have certain documentary proof to support deductions for various write-offs, such as business travel and meal expenses. This proof may be lost because of fire or water damage resulting from a casualty event. In this case, you are allowed to reconstruct your tax records as best you can, from memory and other sources.
The IRS has some guidance on record reconstruction.
While tax relief is welcome, it is certainly better business practice to be prepared for storms and other occurrences. Talk with your insurance agent to make sure you have adequate coverage, including flood insurance if you are located in a flood zone. Also, review your record protection strategies. Storing tax records in the cloud avoids any destruction in case of a casualty event. Finally, if you experience a casualty or disaster loss, talk with your tax advisor to learn how you can take advantage of tax breaks that will save you money and perhaps generate a cash refund now.
*Denotes a link to a non-government Website.
About the Author
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.
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