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.

IRS: Preparing for Disasters


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This video from the IRS has tips for safeguarding important documents in preparation for an emergency.

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. 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.

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.

If your loss deduction is more than your income, you may have a net operating loss (NOL). You don’t have to be in business to have an NOL from a casualty.

A NOL is the amount by which a taxpayer’s business losses exceed its income. For tax years beginning before January 1, 2018, NOLs were able to offset 100% of taxable income and allowed to be carried back two years and carried forward for twenty years. However, TCJA eliminated net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017.

Generally, you may deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement.

The IRS has supplied a Disaster Resource Guide for Individuals and Businesses which provides information for individuals and businesses affected by a disaster. It also covers the help available for disaster victims. The guide can help taxpayers claim unreimbursed casualty losses on property that was damaged or destroyed.

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/

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.