Tax Relief from Uncle Sam for Disaster Victims
by BarbaraWeltman, Guest Blogger
- Created: September 6, 2011, 1:16 pm
In the wake of Hurricane Irene, many businesses are still struggling to recover. If your business property was damaged or destroyed in this storm or in any other disaster this year, there may be some tax relief. Determine whether you are within a disaster area by checking with Federal Emergency Management Agency (FEMA) and to see what tax relief may be available to you.
More time for tax actions
You may have more time to file a return or do other tax tasks. The IRS has the authority to give businesses more time to file returns and do other actions. For example, it has already granted extensions for victims of Hurricane Irene living in certain counties or municipalities in North Carolina, New Jersey, New York, and Puerto Rico. It may extend breaks to victims in other areas after FEMA has a chance to assess the damage. Relief includes an extension to October 31, 2011, for the following actions:
- Filing corporate and partnership income tax returns for 2010 that were on extension and due on September 15, 2011.
- Paying the third installment of estimated tax for 2011 that was to be due on September 15, 2011.
- Filing individual income tax returns for 2010 that were on extension and due on October 17, 2011.
There is also a one-week extension (to September 22, 2011) for filing business returns if Hurricane Irene affected the company’s paid preparer.
The IRS lacks the authority to extend the time to pay employment and excise taxes and to file information returns. However, it can abate penalties for late filings so you won’t be penalized.
Find relief for other recent disasters from the Internal Revenue Service (IRS).
Writing off disaster losses
If your inventory or other business property is damaged or destroyed because of fire, storm, or other such event, and you are not fully compensated by insurance or other reimbursements, you can take a write off. Unlike damaged personal items, which are deductible only in excess of an income threshold, business losses are fully deductible.If the loss occurs in an area declared by FEMA as eligible for federal disaster assistance, then you can choose to deduct losses on a return for the year in which the event occurs or on the return for the prior year. For example, areas affected by Hurricane Irene, which have been declared disaster areas, allow you to deduct your losses on your 2011 return or your 2010 return. If you have already filed your 2010, you’ll have to file an amended return to claim the loss.
For inventory, decrease your opening inventory for the year of the loss so that you won’t take the loss again when reporting your inventory.
IRS Publication 584-B is a workbook to help you determine your deductible losses.
If the loss creates a net operating loss (NOL), you may be able to carry it back for up to two (the usual period) or three years (for a federal disaster loss). This NOL offsets income in those prior years, which can result in a tax refund. This refund can help you to rebuild.
What to do about gains
How can damage or destruction to property result in a gain? It can when insurance or other reimbursements exceed your basis in the property.
For example, say your office furniture, which was worth $3,500 before a disaster, had a basis of zero because you previously wrote off the purchase price. If insurance pays you $3,500, you have a tax gain of $3,500.
The good news: You don’t necessarily have to pay tax on the gain. You can postpone the gain by using the proceeds to restore the damaged property or buy replacement property within a set time period. Two key points:
- The replacement property must be similar or related in service or use to the property destroyed. This requirement is met if you are in a federally declared disaster area and acquire any tangible replacement property.
- You have two years after the close of the year in which your gain is realized to make the replacement.
Related tax and business issues
Any grant that you receive under a state program to reimburse businesses for losses incurred for damage or destruction of property because of a disaster is taxable. Proceeds from business interruption insurance for lost profits are taxable as a replacement for income.
You may qualify for an SBA loan under these programs:
- Business physical disaster loans to replace damaged or destroyed property
- Economic injury disaster loans, regardless of any physical damage
Both programs offer long-term, low-interest loans for small businesses. You can apply online.
The IRS has a Disaster Assistance and Emergency Relief page for individuals and businesses to find information and guidance on tax issues related to federal disasters. Work with your accountant to learn about any other tax breaks you may be entitled to and to minimize any tax cost from the disaster.
Also, check with the SBA for any disaster assistance you may be qualified to receive.
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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