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Monthly Archives: June 2015

Think your IRA is Protected in Bankruptcy? Not Always by Scott Montgomery CLU, ChFC

Posted on June 30, 2015 by Richard Berkowitz, JD, CPA

With the 2005 passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), investors gained the benefit of shielding from creditors up to $1 million in assets held in Individual Retirement Accounts (IRAs) and Roth IRAs when account owners filed for bankruptcy. However, in 2014, the Supreme Court made a clear distinction between owner-funded retirement plans and IRAs that individuals receive from someone else, excluding the latter from protection under federal bankruptcy laws.

 

According to the Court, inherited IRAs lack the retirement-planning aspects of owner-funded plans and permit beneficiaries to make early withdraws without penalty.  With this in mind, the court opined that exempting an inherited IRA from one’s bankruptcy estate “would convert the Bankruptcy Code’s purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a ‘fresh start,’ into a ‘free pass’.”

 

The one exception to the bankruptcy protection rules for inherited IRAs applies to those that are passed along to surviving spouses, who are permitted to move assets into their existing retirement accounts or into a new account in which he or she is named the owner.  At that point, the inherited assets may be shielded from creditor’s claims.

 

In light of the Supreme Court’s ruling, individuals who inherited IRAs or who plan to pass retirement assets to their heirs should consider meeting with their financial advisors to revisit existing estate plans and identify new strategies to preserve tax-benefits and protect wealth for future generations.

 

About the Author: Scott Montgomery, CLU, ChFC, is a registered representative with Raymond James Financial Services and a director with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants.  For more information, call 800-737-8804 or email info@provwealth.com.

 

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Members FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants

 

 This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

BE-10 Survey Extensions Available – Deadline Approaching

Posted on June 29, 2015 by James Spencer

U.S. persons with investments abroad have until midnight, June 30, to request a two-month extension to file an informational BE-10 benchmark survey.  With a properly filed extension request, U.S. individuals, businesses, estates and trusts, and private funds that are new filers for 2014 with more than 10 percent direct or indirect ownership interest in 1 or more foreign affiliates will have until August 31, 2015, to file forms BE-10A, 10B, 10C and/or 10 D with the U.S. Department of Commerce’ s Bureau of Economic Analysis (BEA.)  Without the extension, the filing deadline is June 30.

 To request an extension for filing the 2014 Benchmark Survey, please contact your advisor with Berkowitz Pollack Brant.

 

Summer Jobs Offer Students Important Financial Lessons by Joanie B. Stein, CPA

Posted on June 22, 2015 by Joanie Stein

While school is out for summer, students shouldn’t miss out on opportunities to gain a valuable financial education that comes with a summer job. Often, these temporary positions represent a student’s first source of income and their introduction to U.S. tax laws and the benefits of developing a sound savings strategy.

 

With a paid job, workers will need to complete a W-4 form that asks for basic information, including their name, address and Social Security number, as well as the more complicated question regarding the total number of allowances they are claiming. The more dependents one claims, the less taxes the employer will withhold from his or her paycheck. Most young workers, who are claimed as dependents of their parents’ tax returns will claim zero (0) allowances. Alternately, they may claim themselves as one dependent, and subsequently have more money taken out of their gross pay to cover their tax liabilities.

 

In January of the following year, students will receive a W-2 form that summarizes their gross earnings and the related taxes they paid through paycheck deductions. Students who earn more than $6,100 in 2015 must file an income tax return by April 15, 2016. However, those earning less than $6,100 may also wish to file a return if they claimed zero dependents on their W-4s and had the maximum amount withheld from their paychecks. In these cases, the worker may be due a refund from the government.

 

In addition to taxes, summer jobs come with the responsibility of budgeting and the question of whether to spend or save wages. While spending summer earnings can yield immediate gratification, saving all or a portion of that income can help young workers develop good habits and establish a solid financial cushion for the future. With the benefit of compounding interest, money deposited into a bank savings account or invested in a retirement savings account today can grow exponentially over one’s lifetime. Moreover, relying on a Roth Individual Retirement Accounts (IRA) enables investments to grow tax-deferred until one reaches retirement age, at which point funds may be withdrawn free of tax. For 2015, the maximum allowable contribution to a Roth IRA is $5,500.

 

About the Author: Joanie B. Stein, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals, families and closely held businesses to develop tax-efficient estate planning and wealth preservation strategies. She can be reached at the CPA firm’s Fort Lauderdale office at 305-379-7000 or via email at info@bpbcpa.com.

 

Got Foreign Affiliates? It’s Time to Report by James W. Spencer, CPA

Posted on June 16, 2015 by James Spencer

In an effort to measure the scale of global business activity, the U.S. Commerce Department’s Bureau of Economic Analysis (BEA) conducts quarterly, annual and benchmark surveys that require informational reporting from U.S. individuals, businesses, estate and trusts, and private funds with direct or indirect ownership interest of more than 10 percent in a foreign affiliate.

 

Due to a recent change in the law, all U.S. entities with direct investment abroad are subject to the filing requirement, whether or not they receive a notice from the BEA. As a result, the responsibility to file falls squarely on the shoulders of U.S. reporters and foreign affiliates. Failure to file can result in significant penalties.

 

BE-10 Benchmark Survey

The BE-10 benchmark survey is conducted once every five years, with the most recent survey requiring responses by May 29 or June 30, 2015. The latter deadline applies to first-time filers and those with 50 or more foreign affiliates.

U.S. persons with interests outside the U.S. must file Form BE-10A as well as Forms BE-10B, 10C and/or 10D. The selection of the required supplemental forms depends on several factors, including the extent of the U.S. person’s ownership interest in the foreign affiliate and the foreign affiliate’s amount of assets, sales or net income during 2014.

Responses to the survey are required of qualifying entities, even when they do not receive a notice from the BEA, unless they meet the following exemptions:

  1. They are residing in the United States as a result of official employment by a foreign government (including the immediate family of such persons), or
  2. They have been and expect to be residing in the U.S. for less than one year; or 2) is fully consolidated in the BE-10 report of another U.S. person.

If you received a survey from the BEA or believe you may be required to file a BE-10, please contact your tax advisors with Berkowitz Pollack Brant.

About the Author: James W. Spencer, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at info@bpbcpa.com.

 

 

Some Florida Businesses Must File Amended Returns to Comply with Revised Corporate Tax Code by Karen A. Lake, CPA

Posted on June 12, 2015 by Karen Lake

Due to recent revisions to Florida’s Corporate Income Tax Code, Florida-based corporations and/or partnerships that have a corporate partner may be required to amend their 2014 returns to reflect a modified, often higher, taxable income.

 

Under the bill, signed into law by Governor Rick Scott on May 14, 2015, Florida retroactively decoupled, or disassociated, from Federal bonus depreciation and expense reduction guidelines for assets placed in service during the 2014 tax year.

 

More specifically, the state requires affected corporations that took a bonus depreciation on equipment it purchased, financed or leased during the 2014 tax year to add back to their taxable income “an amount equal to 100 percent of any amount deducted for federal income tax purposes as bonus depreciation.”  To claim the depreciation, companies will subtract one-seventh of depreciation over a seven year period.

 

About the Author: Karen A. Lake, CPA, is associate director of Tax Services with Berkowitz Pollack Brant, where she helps businesses and individual navigate complex federal, state and local taxes, credits and incentives. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email info@bpbcpa.com.

 

 

The Importance of Selecting and Updating Beneficiaries by Scott Montgomery, CLU, ChFC

Posted on June 12, 2015 by Richard Berkowitz, JD, CPA

Naming a beneficiary to receive proceeds from a life insurance policy or retirement account is a difficult decision that requires consideration of a range of factors. Because these selections supersede designations contained in one’s will, they are an important step in the estate-planning process that must be addresses with particular care and attention to details.

 

Selecting Beneficiaries

When selecting beneficiaries, account owners should be aware of state laws that require they name a spouse as a primary beneficiary or that entitle a surviving spouse to a certain percentage of the deceased spouse’s estate.  For example, under Florida’s Elective Share or Election Against a Will, a surviving spouse who is not named as a beneficiary of his/her deceased spouse’s retirement accounts may make an election to claim 30 percent of the decedent’s estate. With a properly signed waiver by a spouse, one could transfer his or her retirement savings into a trust or directly to children and grand-children, which may be a preferable option in instances of second and third marriages.

 

Another important point to consider when naming a beneficiary is that such a selection may negatively affect government benefits provided to family members, such as special-needs children.  As a result, the decision should be addressed with one’s entire estate plan and ongoing family needs in mind.

 

Naming Backup Beneficiaries

While insurance companies and retirement plans require owners/insureds to name one primary beneficiary to receive assets upon the owner’s death, it is recommended that owners name a secondary, contingent beneficiary to inherit assets when the primary beneficiary is not able to receive them.  Account owners may select as many beneficiaries as they wish and may consider naming a trust as a beneficiary to protect assets from creditors.  Additionally, one should consider having life insurance policies owned by and paid to a properly drafted insurance trust to avoid estate and gift taxes.

 

Updating Beneficiaries

Relationships and circumstances evolve over time. For this reason, it is vital that individuals regularly review their estate plans and ensure their named beneficiaries are updated to reflect these changes.  Doing so requires the simple tasks of requesting a beneficiary change form from an insurance company or retirement plan, completing and signing the document and returning it to the issuing company or completing the form online by logging in to one’s account.  When electing to name a beneficiary other than one’s spouse, it is always prudent to speak with an advisor to understand the consequences of such a decision.

 

About the Author: Scott Montgomery, CLU, ChFC, is a registered representative with Raymond James Financial Services and a director with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants.  For more information, call 800-737-8804 or email info@provwealth.com.

 

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Members FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

 

This material is being provided for information purposes only and is not a complete description,

nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Government Offers Alternative Savings Tool for Special Needs Families by Lee Hediger

Posted on June 10, 2015 by Richard Berkowitz, JD, CPA

Historically, Americans with disabilities who held assets valued at more than $2,000 risked losing government benefits, such as Medicaid and Supplemental Security Income, unless they created special-needs trusts. However, with the December 2014 passage of the Achieving a Better Life Experience (ABLE) Act, disabled individuals and their families will soon be able to begin saving as much as $100,000 tax-free without forfeiting for public assistance.

 

Similar to 529 college tuition-savings plans, 529 ABLE accounts will be administered on the state level. Maximum after-tax contributions will be limited to $14,000 per year, per beneficiary with the first $100,000 of savings excluded from the $2,000 personal asset limits to qualify for government benefits. As a result, public assistance would be preserved while allowing account assets to be spent on specific expenses required to maintain the care and quality of life of disabled individuals, including therapy, rehabilitation, education, housing and transportation, tax-free.

 

While ABLE accounts will provide an inexpensive and simple option for families to save money for the continuous care of special-needs children without jeopardizing eligibility for need-based government aid, they do come with limitations that require careful consideration and comparison to more traditional special needs trusts.

 

A special needs trust, also known as a supplemental needs trust, safeguards assets and allocates money for the continuous care of special-needs children without jeopardizing eligibility for need-based government aid.   For example, there are no contribution limits to special needs trusts, which can be customized to meet each family’s unique circumstances and the specific requirements of special-needs children. Conversely, assets held in ABLE accounts above the $100,000 threshold will count against beneficiaries’ eligibility to receive SSI, which will be suspended when ABLE balances exceed this limit. Additionally, there are no governmental restrictions on how beneficiaries may spend assets held in a trust, including allocation for discretionary, non-medical expenses. With ABLE accounts, distributions used for non-qualifying expenses will be taxed to the beneficiary as ordinary income and may be subject to an additional 10 percent penalty. The same tax and penalty applies should individuals take back any of funds they invested funds in the ABLE account. Moreover, should beneficiaries pass way with an ABLE account balance, their estate would be required to repay the state for Medicaid benefits the deceased received after the ABLE account was established.

 

Despite these limitations, one should remember that special needs trusts come with their own set of challenges and tax burdens. Both undistributed trust income and distributions to beneficiaries are taxed at the ordinary income rate. Additionally, establishing a special needs trust will require the expenses of retaining experienced estate planning counsel to develop, administer and manage the trust assets and its related tax liabilities, which can be reduced through proper planning.

 

It is expected that the first states to roll out 529 ABLE accounts will begin doing so in June 2015. Families should begin weighing the pros and cons of this program now to ensure that they select the savings vehicles that is best suited to their budget and needs and those of their disabled family members.

 

About the Author: Lee F. Hediger is a director and chief compliance officer with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants. He can be reached at reached at (954) 712-8888 or via email at info@provwealth.com.

 

 

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Securities offered through Raymond James Financial Services, Inc., Members FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. Any opinions are those of PWA and not necessarily those of RJFS or Raymond James.

 

This material is being provided for information purposes only and is not a complete description,

nor is it a recommendation. Any opinions are those of Lee F. Hediger and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional.

 

The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Rules and laws governing 529 ABLE plans are varied and subject to change.

 

Prior to making an investment decision, please consult with your financial advisor about your individual situation.

You Can Fix Mistakes on Your Tax Returns by Adam Slavin, CPA

Posted on June 09, 2015 by Adam Slavin

Taxpayers who discovered missing information or mistakes on their already-filed federal tax returns need not worry. It is not uncommon to correct these errors by filing an amended return. In fact, the process is quite simple when taxpayers address the following rules.

Use IRS Form 1040X, Amended U.S. Individual Income Tax Return

Taxpayers must complete Form 1040X on paper and mail it to the IRS. E-filing is not permitted. When amending returns for more than one year, taxpayers should complete separate Form 1040Xs and mail each one in separate envelopes.

Wait for Refund before Filing Amended Return

When expecting a refund from an original tax return, taxpayers should wait to receive that payment before filing an amended return. The IRS allows taxpayers three years from the date of filing their original tax returns to file an amended return with Form 1040X, or they may file within two years from the date they paid taxes, if that date is later. For these purposes, April 15 is the date taxpayers should use when their original returns were filed on or before April 15 in any given year. However, taxpayers who originally filed their returns before the October 15 extension, are considered to have filed on that date.

Act Fast When Additional Taxes are Due

Should the IRS detect that a taxpayer understated his or her tax responsibilities, it will add interest and penalties on top of the unpaid taxes. In general, the IRS has three years after an original return filing to identify errors and omissions. However, when an original return understated gross income by more than 25 percent, their statute of limitations is extended to six years. To avoid this scenario and limit penalties and interest on understated liabilities, taxpayers should file an amended return and pay the taxes due as soon as possible.

Get Help        

Despite the simplicity of completing Form 1040X, taxpayers should consult with an experienced accountant who may be able to assist in minimizing penalties related to understatements of income. Taxpayers will still be required to pay unpaid amounts plus interest, but a CPA can help to ensure that amended returns meet IRS requirements and are filed in a timely manner.

About the Author: Adam Slavin, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practices. He can be reached in the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

IRS Data Breach Impacts More Than 200,000 Taxpayers by Joseph L. Saka, CPA/PFS

Posted on June 05, 2015 by Joseph Saka

More than 100,000 U.S. taxpayers may be victims of identity theft following a recent data breach through the IRS’s online “Get Transcript” application. According to the IRS, criminals gained access to its system by using taxpayer’s social security numbers, birth dates and addresses that hackers had obtained previously. In addition, hackers tried, but failed, to access more than 100,000 additional taxpayer accounts.

The IRS will contact the more than 200,000 affected taxpayers of the attempted and successful data breaches via notices sent out via postal mail. It will also provide instructions to allow taxpayers to sign up for free credit monitoring services.

Berkowitz Pollack Brant advises clients who receive notices from the IRS to contact the firm and work with their accountants to manage the issue. Moreover, clients should take the time now to review their online identities and bolster security measures, such as using unique usernames and strong passwords that include at least eight characters and a mix of upper and lowercase letters, numbers and special characters. Two-factor authentication, in which login information requires users answer “secret” questions such as the name of one’s first pet, may also be employed to provide an added level of security. However, individuals must be careful to select questions and answers that a criminal could not easily access through public records or social media.

About the Author: Joseph l. Saka, CPA/PFS, is director-in-charge of Berkowitz Pollack Brant’s Tax Services practice, where he focuses on pre-immigration planning, wealth-preservation strategies and accounting for high-end collectables such as artwork, jewelry and luxury goods. For more information, contact him in the accounting firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.

Safeguard Records During Hurricane Season by Joseph L. Saka, CPA/PFS

Posted on June 05, 2015 by Joseph Saka

The start of hurricane season is the perfect time for individuals and businesses to secure their records and begin preparing for potential losses that could result if a storm should strike.

 

Document Assets

Taxpayers should create an inventory of their highly-valued assets, such as jewelry, art and other collectibles, as well as more common items that could become damaged, such as furniture, appliances and office equipment.   Disaster losses not covered by an insurance policy may be deductible on an individual’s income tax returns. The IRS recommends that taxpayers photograph or videotape assets to maintain an up-to-date inventory and to demonstrate their fair market value when making claims of loss. Photographic records may be stored in a safety deposit box or with a friend or family member who resides in another state.

 

Backup and Create Duplicate Records

Taxpayers should consider scanning paper copies of tax returns, bank statements, insurance policies and other vital financial and legal documents in electronic format and saving them to the “cloud” or other online file-management service. Alternately, electronic copies can be saved to an external hard drive or USB flash drive that can be easily accessed after a storm passes. While these electronic storage options are convenient and easy to use, some individuals may prefer to maintain a duplicate set of records on hard-copy paper. In these situations, taxpayers should store documentation in waterproof containers, separate from original copies.

 

Review Insurance Policies

Taxpayers should regularly review insurance policies to ensure they are up-to-date and provide ample protection to cover potential physical damage to one’s current assets. In addition to property insurance, business owners should consider the benefits a business interruption insurance policy can provide to cover losses resulting for their companies’ inability to continue normal operations following a covered peril.

 

Update Emergency Plans

Emergency plans help to ensure the safety of family members and employees and provide them with guidance on how they may maintain communication should electricity and phone service be impacted by a storm. While these plans should be reviewed and updated annually, businesses, in particular, should consider implementing a strategy for communicating these policies to employees at the start of each hurricane season and providing reminders each time a storm threatens.

 

About the Author: Joseph l. Saka, CPA/PFS, is director-in-charge of Berkowitz Pollack Brant’s Tax Services practice, where he provides income and estate planning, tax consulting and compliance services, business advisory and financial planning services to entrepreneurs, high-net-worth families and business executives in the US and abroad. For more information, contact him in the accounting firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.

 

Landmark Case has Far-Reaching Effect for Taxpayers Who Live and Work in Different States by Karen A. Lake, CPA

Posted on June 05, 2015 by Karen Lake

A recent U.S. Supreme Court decision could mean more money in the pockets of taxpayers who live and work in multiple states.

 

In Comptroller v. Wynne, the court found unconstitutional Maryland’s personal income tax system, in which residents do not receive a full credit for taxes they also pay in other states where they reside, work or operate businesses.  The ruling has implications outside of Maryland’s borders to other states with similar income-tax regimes that create multiple taxation for residents and business owners.

 

In its ruling, the court found that Maryland hindered interstate commerce by creating a higher tax burden on its residents.  Furthermore, the court asserted that “states cannot subject corporate income to tax schemes similar to Maryland’s, and we see no reason why income earned by individuals should be treated less favorable.”

 

While the decision will force Maryland to issue refunds who were subjected to double taxation, other states with similar tax regimes will need to review their laws and recognize how the Wynne decision will apply to their tax systems.  Taxpayers across the country may have an opportunity to seek a refund from their local taxing authorities.

 

About the Author: Karen A. Lake, CPA, is associate director of Tax Services with Berkowitz Pollack Brant, where she helps businesses and individual navigate complex federal, state and local taxes, credits and incentives. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email info@bpbcpa.com.

Are You Ready to Meet the FBAR Filing Deadline? by Andrew Leonard, CPA

Posted on June 04, 2015 by Andrew Leonard

 

U.S. citizens and resident aliens with financial interests in or signature or authority over foreign bank accounts, securities and brokerage accounts, mutual funds, trusts or other accounts with an aggregate value exceeding $10,000 at any time during the year, must file by June 30 a Report of Foreign Bank and Financial Accounts (FBAR).  Identifying these accounts should be fairly easy. The difficulty for many citizens and permanent residents is understanding what qualifies as “other financial accounts” that must be reported to the IRS on FinCEN Form 114, Report of Foreign Bank and Financial Accounts.

 

Under the law, “other financial accounts” are defined as those “with investment funds and/or entities that regularly accept deposits in the manner of a financial agency.” Because the definition is fairly broad, it is not uncommon for taxpayers to overlook or erroneously exclude certain accounts from their FBAR reporting, resulting in significant penalties of up to 50 percent of value of the accounts for each year it goes unreported. For example, a lawyer who has signature authority over a client’s foreign trust account would need to report that on his or her FBAR. Last year, the District Court of Northern California ruled that foreign online gambling accounts fall under the FBAR reporting guidelines when a U.S. citizen deposits or withdraws money from those accounts at will. More recently, IRS officials noted that an offshore PayPal account could be a reportable financial account when the owner conducts business transactions through the account.

U.S. taxpayers should seek the guidance of professional counsel experienced in domestic and international tax regulations to ensure complete compliance with applicable laws and minimize risks of non-compliance.

About the Author: Andrew J. Leonard, CPA, is a senior manager in the International Tax Services practice of Berkowitz Pollack Brant, where he focuses on pre- and post-immigration tax planning for individuals from Asia, Latin America and Russia as well as filing disclosures for U.S. citizens with foreign interests. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

It’s Hurricane Season. Is Your Business Prepared? by Daniel S. Hughes, CPA/CFF/CGMA

Posted on June 01, 2015 by Daniel Hughes

June 1 marks the start of a six-month hurricane season and the potential for tropical winds and rising sea levels to leave a lasting mark on personal property and interruption of business operations.  While Floridians have enjoyed nearly nine years without a major hurricane, they should remember the cyclical nature of tropical storms and not be lured into a false sense of security.  Advance planning and preparation for potential business interruption can mean the difference between recovery and loss of economic damages.

 

Property Insurance vs. Business Interruption Insurance

Property insurance covers physical damage to a business’s assets following a disaster.  Business interruption insurance covers the loss of income resulting from a business’s inability to continue normal operations following a covered peril.  Recovery of such economic losses are dependent on a wide range of factors, including a business’s ability to prove and quantify the damages it sustained.

 

Substantiating Economic Damages

One of the most reliable sources for substantiating business interruption losses can be found in a business’s financial records.  Complete, accurate and up-to-date documentation of a business’s past, present and future financial performance demonstrates the income it would have generated had the covered peril not occurred.  These records include, but are not limited to, three to five years of financial statements, tax returns, sales volumes, historical budgets / forecasts, general and subsidiary ledgers and other accounting journals for parent companies and their subsidiaries.  Additionally, businesses should maintain documentation that details its current operations, including inventory records, pending and fulfilled sales or orders, and a fixed-asset schedule, which itemizes the equipment the business owns, the dates of purchase, the dates the business put the equipment to use and the rate of depreciation on those assets.  Similarly, businesses may consider creating a video of its facilities and assets and including an audio narrative of the recording describing offices, production facilities, warehouses, showrooms and other assets.

 

In addition to maintaining accurate records to substantiate economic losses, businesses should take extra caution to preserve and store these reports in a safe location where they may be protected from storm damage and easily accessed after a storm passes.  Options can include fire-proof boxes, off-site storage facilities or online or cloud-based storage services.

 

Finally, it is a good practice for businesses to regularly review their property damage and business interruption insurance policies to understand the types and amount of coverages that are in place.  All too often, a policyholder will learn about gaps in coverage or limits well below the potential value at risk after they incur losses.

 

The time to plan for a hurricane or other unpredictable disaster is not a week, days or hours before impact.  Rather, businesses should consult with advisors to review existing policies and take steps to ensure their records are up to date and safely preserved year-round. Doing so will help to improve their ability to substantiate and recoup losses.

 

The Forensic Accounting and Business Insurance Claims practices of Berkowitz Pollack Brant helps businesses prepare for hurricanes and other perils and maximize recovery of financial losses.

 

About the Author: Daniel S. Hughes, CPA/CFF/CGMA, is a director in Berkowitz Pollack Brant’s Forensics and Business Valuation Services practice, where he works with business’s to assess and quantify economic damages and lost profits resulting from natural disasters, commercial disputes and fraud. He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

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