Why Mother Nature Is a Potential Tax Nightmare
Natural disasters can devastate more than the building your business operates from. They can also destroy your tax records. What recourse does your business have?
If a disaster strikes and records are destroyed and assets lost, it could mean a major tax nightmare for your business. Tax obligations, including proof of loss, filing, and payment deadlines can put a major burden on impacted businesses and individuals.
This is why the IRS promotes disaster preparedness as well as offers tax credits for those who have been impacted by a natural disaster. Here’s what you need to know.
What happens if a natural disaster hits?
If some or all of your records are destroyed in a disaster in addition to the property, the IRS suggests following certain steps to obtain the information you need to reconstruct your records.
For property damage, the IRS suggests taking photographs and videos right after the disaster to help “establish the extent of the damage” as soon as possible. Then, contact the insurance company and mortgage company, review all of your policies, and even get in touch with any contractors who may have done work and may still have records about the work they did to the property. The IRS also suggests:
- Obtaining written accounts from those who were familiar with the property
- Getting loan paperwork from the applicable institution
For business-record loss, you should take the following steps:
- Make lists of inventories
- Ask suppliers for copies of invoices
- Obtain copies of bank statements
- Obtain copies of all previous tax returns
- Sketch the former business property if no photos or videos are available
Getting started on these tasks right away will help you rebuild your business quickly.
Tax credits for those impacted by natural disasters
The IRS offers some tax relief for those impacted by a natural disaster. Affected taxpayers include individuals, business entities or sole proprietors, or shareholders in an S Corporation who had records necessary to meet a tax deadline located in a disaster area.
Casualty loss deduction
The casualty loss deduction is a major tax break provided by the law and applies to casualty losses due to damage, destruction, or loss of property from any sudden, unexpected, or unusual event.
This deduction is generally claimed in the year of the disaster, but victims of natural disasters can file an amended tax return for the previous year to deduct the loss, instead of waiting until the year ends in which the disaster occurred. This helps them have a lower tax obligation for that previous year, meaning they can better afford to pay for the recovery process.
Because looming deadlines can be hard for businesses to meet when they’ve just been hit by a disaster, the IRS offers tax extensions for filing and paying taxes. Also, businesses can have additional time to send in their payroll taxes and returns, and penalties and interest are waived.
If you haven’t yet experienced damage from a natural disaster, there are steps you should take now to prepare in advance.
What can you do to prepare for a disaster?
1. Back up documents
Important documents such as bank statements, tax returns, and insurance policies, should be stored safely and securely, but also backed up regularly. Hard copies should be stored in a waterproof container and there should be another set of these documents stored in another location.
Electronic backups should also be incorporated into your disaster preparedness strategy. These documents could then be retrieved after the event. Just make sure that scans are also stored in a secure online format.
2. Create a list of assets
Taking photographs of your property and assets can help you in the event of a disaster. Also, create lists of all of your business’s valuables and what they’re worth. Update this regularly.
3. Update emergency plans
Your business should update its emergency plan at least once a year, and whenever there are new employees hired, a location is changed, or another company change occurs. This ensures that everything is up-to-date and ready in case disaster strikes.
You need to ensure that your business is ready for the worst. Losing important records and assets can be a big headache, especially when it comes to your tax obligations. Prepare in advance to ease your tax burden, and make sure you take advantage of applicable tax credits if something does occur.
If you have questions about your disaster recovery plan or your tax obligations after a disaster, get in touch with Provident CPA & Business Advisors.