Hurricane Sandy: Tax and Financial Implications for Your Small Business
by BarbaraWeltman, Guest Blogger
- Created: December 21, 2012, 8:29 am
The storm that hit the East Coast of the U.S. on October 29 created devastation for individuals and businesses. Many companies were forced to remain closed for days or even longer because of damage to business facilities, employees being unable to get to work due to the failure of public transportation systems, closures of bridges and tunnels, power outages and long gas lines. Here is what companies should know about tax and financial opportunities to help recover from this storm and the lessons for everyone going forward.
The IRS has made a number of pronouncements in the wake of Hurricane Sandy to provide relief to affected businesses as well as to those who want to help hurricane victims. Here is a brief roundup of some key items:
Extensions for filing returns and paying taxes. The deadline for filing tax returns and paying income taxes otherwise due from the time of the storm through the end of January 2013 is extended until February 1, 2013. This means that the fourth installment of 2012 estimated taxes for corporations (otherwise due on December 17, 2012) and for self-employed individuals (otherwise due on January 15, 2013) can be made up to February 1, 2013.
Relief applies automatically to businesses within declared disaster areas. Businesses outside these areas that have been impacted by the storm (e.g., records are stored within a disaster area) can call the IRS and request relief at 866-562-5227.
Technically, the IRS has no authority to extend the deadline for depositing payroll taxes and excise taxes. However, it has provided relief nonetheless by waiving any late deposit penalties as long as the deposits are made by November 26, 2012.
Disaster losses. Businesses in an area eligible for FEMA assistance (an area declared to be a disaster area by the president) that have uninsured property losses can opt to deduct them on their 2012 tax return or claim them on a 2011 return. Taking the loss on a 2011 return requires filing an amended return, which can produce a tax refund more quickly than waiting to file for 2012. Before opting to do so, consider:
- Which year will result in the larger tax savings (based on overall income and deductions for each year)? You may not know this until your 2012 return is being prepared in 2013.
- Taking the loss on the 2011 return does not reduce self-employment tax for that year. The 2012 disaster loss only impacts income taxes in 2011 if the loss is carried back to that year.
If you’re eligible for a disaster loss deduction, work with your tax advisor to determine the better year in which to take the loss.
Victims of the storm may recoup some of their property losses and get back to business by insurance recoveries, assistance from FEMA or other agencies and organizations, and through SBA disaster loans (explained later).
Property damage. If your business property was damaged or destroyed, your business owner’s policy (BOP) can provide relief to the extent of the coverage you carry (minus your deductible). Watch for limits on the policy, such as payments for flood or hurricane damage; talk to your agent about this.
Lost profits. If you have business interruption coverage, you may be reimbursed for expenses you have during your recovery period, such as rent, payroll, and utilities. The coverage also pays for lost profits (defined in your policy). It may also pay for replacement space, such as another office that you use until your own can be repaired.
If you don’t have such coverage, discuss this with your insurance agent to determine whether to buy it now for protection in case of future disasters.
Disaster relief grants. If your business receives any disaster relief grants, they are fully taxable. Unlike such help for individuals, disaster relief payments to businesses are always taxable.
Other relief items
Even though you are outside of the affected areas, your business may help with disaster relief efforts. If your business has a leave-donation program where employees can donate unused vacation, sick, or personal days to charity, there is a special rule for donations to storm victims. Usually, the donated leave is taxable to employees, but for donations for Hurricane Sandy relief, the unused leave is tax-free. Employees cannot take a charitable contribution deduction; employers can. Alternatively, employers can opt to treat the donated leave as compensation. The funds must be forwarded to an IRS-approved charity no later than December 31, 2013.
If your business obtains a disaster loan from the SBA for physical damages or economic injury, the loan proceeds are not taxable. Interest payments are tax deductible.
Natural disasters are devastating for those impacted by them. They also serve as warnings to businesses outside affected areas to become better prepared for future events. Work with your tax and insurance advisors to review your disaster preparedness and recovery plans.
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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