Natural disasters can happen at any time. Whether it’s a hurricane, fire, flood, earthquake or tornado, when disasters strike taxes are not the first thing that comes to mind. Rescuing life, providing relief and restoring individuals and businesses back to normal is what matters. However, for better or worse, taxes do play a part. The disruption and destruction caused by natural disasters to both individuals and businesses make tax relief necessary and helpful to the restoration process.

After a natural disaster reconstructing your financial records may be essential for properly documenting a tax-deductible loss, supporting various tax-related transactions or getting federal assistance or insurance reimbursement. The more accurately the loss is estimated, the more loan and grant money there may be available.

Preparing for natural disasters

The IRS has posted tips in the past with suggestions including:

  • Update your emergency plan annually to reflect changes in your personal and business life
  • Make electronic copies of key documents
  • Take video or photograph inventory of your valuables
  • Keep an accessible copy of your prior-year tax return

In a federally declared disaster, taxpayers can call 866-562-5227 to speak to an IRS specialist for help.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax Records

  • Get a copy of your transcript by going to IRS.gov and using the Get Transcript application. By selecting “Get Transcript Online,” you can immediately view, print or download your transcript.
  • Order transcripts by calling 800-908-9946 and following the prompts.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company, or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association, and Edmunds.

More Information:
Publication 547, Casualties, Disasters and Thefts
Publication 584, Casualty, Disaster and Theft Loss Workbook
Publication 584-B, Business Casualty, Disaster and Theft Loss Workbook

Small Business Administration
DisasterAssistance.gov

Key Areas of Federal Tax Relief

At the federal level, there are some key provisions that you need to be aware of such as what qualifies as a disaster area loss, a casualty loss, and qualified disaster relief payments.

Disaster Area Losses

federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance. No matter the type of disaster or how devastating it is, before the IRS can choose to authorize tax relief, the Federal Emergency Management Agency must issue a major disaster declaration. Generally, the IRS will authorize disaster tax relief to all areas identified on a major disaster declaration if FEMA identifies at least one area qualifying for their Individual Assistance program.

Review the IRS’ Around the Nation page for news specific to local areas, primarily disaster relief or tax provisions that affect certain states. The IRS has also provided resources for disaster situations that focuses on the most recent disasters.

To better understand what happens after a disaster that leads to taxpayer relief, the IRS shares some tax-related things that usually happen after a major disaster in IRS Tax Tip 2021-131.

Casualty Losses

A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. If your property is personal-use property or isn’t completely destroyed, the amount of your casualty loss is the lesser of:

  • The adjusted basis of your property, or
  • The decrease in the fair market value of your property as a result of the casualty

If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis. You must reduce the loss, whether it’s a casualty or theft loss, by any salvage value and by any insurance or other reimbursements you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation.

Individuals and businesses that suffer losses in a federally declared disaster area may elect to deduct the loss either in the tax year in which it occurred or in the immediately preceding tax year.

Individual taxpayers face certain hurdles when it comes to casualty losses, which for federal income tax purposes are defined by the Internal Revenue Service as losses that “result from the damage, destruction or loss of property from any sudden, unexpected event.”

The first major hurdle is determining the amount of the loss. IRS Form 4684, Section A, walks through the calculation process step by step, but generally speaking, the loss is:

  • The lesser of the property’s adjusted basis (typically original cost, adjusted for improvements and in certain cases, depreciation) prior to the casualty or the decrease in fair market value as a result of the casualty.
  • Reduced by the amount of any insurance, salvage value or other reimbursements that have been received or are expected to be received.
  • Further reduced by $100 for each casualty loss (for example, loss due to wildfires would count as one casualty loss).

The second hurdle, and perhaps the greatest, is that casualty losses for individuals are reported on Schedule A of Form 1040 as an itemized deduction and are subject to a very specific limitation. Only those losses that are greater than 10 percent of a taxpayer’s adjusted gross income (AGI) (line 37 of Form 1040) may be deducted. This limitation is applied after the loss calculation and $100 reduction noted above.

The taxpayer’s total itemized deduction amount, including the casualty loss, must be greater than the standard deduction to make it worth claiming. If the amount is not, it is better to stick with the standard deduction.

The guidelines are less stringent for individuals with casualty losses to income-producing property (rental property, for example) and for businesses with casualty losses, as the amounts are not subject to the $100 reduction per casualty and 10 percent AGI limitation. These types of losses are reported on IRS Form 4684, Section B, and then on IRS Form 4797. They generally follow the calculation above, except that if the property is completely destroyed, the fair market value computation is not considered.

Qualified Disaster Relief Payments

Qualified disaster relief payments include payments from any source to or for an individual paid as a result of a qualified disaster:

  • to pay or reimburse reasonable and necessary personal, family, living, or funeral expenses, including personal property expenses;
  • to pay or reimburse necessary expenses incurred for the repair of a personal residence, including one that is rented, or its contents;
  • including payments made by a common carrier on account of death or personal physical injury; and
  • including amounts paid by a federal, state, or local government to promote the general welfare.

Audit Relief

Taxpayers may also obtain audit relief. It has been reported that IRS agents have been informally telling tax professionals that audit and collection activities in disaster areas will be delayed. This is not a formal policy. However, if a taxpayer would like to keep their case going to obtain closure sooner, they can contact the IRS.

Guidance for Those Affected by Disasters

The IRS has provided taxpayers with links to several different pages of Frequently Asked Questions (FAQs). Each set of FAQs is about a specific topic to help people after a disaster. To read more, visit FAQs for Disaster Victims.

Key Areas of State Tax Relief

When disasters strike, generally the states directly involved are the first to provide relief similar to that at the federal level such as the postponement of return due dates and other applicable relief depending on the situation. Other states, not directly affected, generally follow by allowing taxpayers located in federally declared disaster areas or impacted by the disaster to request filing extensions and obtain relief.

Taxpayers who reside in or have a business located in counties as specified by the IRS will qualify for the relief. If additional areas are identified by the IRS, relief is also provided to those areas. The relief also applies to taxpayers not in the disaster area, but whose records are located in the disaster area.

For an up-to-date list of tax relief offered by state, contact LBMC or visit http://cost.org/WorkArea/DownloadAsset.aspx?id=96838 and http://www.cost.org/

A Quick Reference for Business Leaders

When it comes to mother nature, there’s little we can do but prepare for whatever she brings our way. This is especially true when it comes to natural disasters like earthquakes, tornadoes, hurricanes, or blizzards. While your number one priority may be keeping your employees and customers safe, keeping your business running during a disaster should be on your mind as well.

This Natural Disaster Survival Guide will review how different natural disasters can impact your business, and what to look out for.

If you would like to discuss further, contact us to discuss how we can prepare your business in the case of disaster.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.