Taxpayers affected by disasters, such as fires, floods or hurricanes, may need to reconstruct their records to prove they suffered losses for tax purposes and to qualify for federal assistance and insurance reimbursement. Following are some resources to help individual obtain copies of documentation that they may have lost as a result of a disaster event.
Proof of Loss. Losses sustained in certain disaster situations may qualify for insurance reimbursement when an active policy is in place. Alternatively, taxpayers may qualify to deduct unreimbursed losses on their federal income tax returns. As soon as possible after a disaster strikes, taxpayers should take photographs and narrate a video recording the extent of the damages to their property.
In an ideal world, individuals will already have a cloud or digital back-up of receipts as well as a photographic and video inventory of all of the assets they own, from highly valued jewelry to common household appliances. Such digital documentation is critical for proving ownership and demonstrating the fair market value of property at the time of the loss. If taxpayers did not keep these records in a safe place, they may be able to find photographic evidence of the assets on their phones. Purchases taxpayers made by credit or debit card may be available online or by contacting their financial institutions directly.
Property Records. Taxpayers must demonstrate that they own property and provide some evidence of the property’s value before it sustained damage. When a loss involves a car, taxpayers can obtain the auto’s fair market value by going online and looking it up on Edmunds or Kelly’s Blue Book.
For real estate, taxpayers may contact the title company, escrow company or bank that handled the purchase of their home to get copies of appropriate documents. If the taxpayer received the property as a part of an inheritance, he or she can check court records for probate values or contact the attorney who handled the decedent’s estate. When no other records are available, taxpayers can check the county assessor’s office to find records that address the property’s value.
If taxpayers made improvements to their homes, which in turn improved the property’s value, they may contact the contractors they worked with in order to obtain statements verifying the cost of the work. As a last resort, taxpayers can request that their friends and relatives provide written statements describing the home before and after the improvements were made.
Prior Year Tax Returns
It is recommended that taxpayers hold onto their tax returns for a minimum of seven years since the IRS can go back six years to audit a return in which the agency presumes a taxpayer omitted income. However, there is no statute of limitations when the IRS proves that a taxpayer filed a fraudulent return.
While individuals can often receive copies of their most recently filed returns by contacting their tax accountants, a better option may be to visit the IRS website or call the agency at 800-908-9946 to can get free copies of their tax return transcripts.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at email@example.com.
Individuals who reside or own businesses in certain regions of Florida and Georgia, which the president declared as disaster areas following the October 7 landfall of Hurricane Michael, may qualify for various forms of tax relief from the Internal Revenue Services. The designated disaster areas in Florida are Bay, Calhoun, Franklin, Gadsden, Gulf, Hamilton, Holmes, Jackson, Jefferson, Leon, Liberty, Madison, Suwannee, Taylor, Wakulla and Washington counties. In Georgia, the relief extends to taxpayers in Baker, Bleckley, Burke, Calhoun, Colquitt, Crisp, Decatur, Dodge, Dooly, Dougherty, Early, Emanuel, Grady, Houston, Jefferson, Jenkins, Johnson, Laurens, Lee, Macon, Miller, Mitchell, Pulaski, Seminole, Sumter, Terrell, Thomas, Treutlen, Turner, Wilcox, and Worth counties.
As recovery efforts continue, it is crucial that taxpayers keep in touch with their accountants and pay attention to announcements from local and federal agencies, which may extend tax relief to other counties affected by the storm.
Tax Deadline Extensions
Affected taxpayers will have until Feb. 28, 2019, to meet all of the tax-filing and payment obligations that had original deadlines beginning on Oct. 7, 2018, including the extended filing of 2017 tax returns, normally due on October 15 and quarterly estimated income tax payments that are usually due on Jan. 15, 2019. The extension also applies to quarterly payroll and excise tax returns typically due on Oct. 31, 2018, and Jan. 31, 2019, as well as the annual tax returns of tax-exempt organizations that operate on a calendar-year basis that had an automatic extension due on Nov. 15, 2018. In addition, the IRS has granted penalty relief to qualifying businesses that had payroll and excise tax deposit obligation on or after Oct. 7, 2018, as long those companies make the deposits by Oct. 22, 2018.
Most taxpayers do not need to contact the IRS to receive the postponement of time to meet their tax obligations. The IRS automatically applies filing and payment relief to those individuals and businesses it identifies as being located the covered disaster areas. This relief is also granted to volunteers and other workers who travel to the covered areas to provide aid as part of an organized government or philanthropic organization.
Taxpayers who live or own businesses in federally declared disaster areas have the option to claim casualty losses resulting from Hurricane Michael on their 2018 or 2017 tax returns. Taxpayers who already filed their 2017 tax returns may choose to file an amended return for that year, especially when considering that deducting losses in 2017, when tax rates were higher, could yield a much larger tax break than if used those losses to offset income in 2018 when tax rates are lower and taxable income may be lower due to the disaster anyway. If taxpayers are party to a partnership or joint venture located or operating in the disaster area, they too should communicate with their partners to consider the benefits of amending their 2017 income tax returns as well.
Taxpayers who must rebuild and/or repair storm-damaged property may be able to deduct some of these expenses under the tangible property regulations. In addition, taxpayers whose losses from the storm include their prior year tax returns may receive copies free of charge as long as they complete and submit to the IRS Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, with the words “Florida Hurricane Michael” written in red ink at the top of those forms.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
We are getting to the peak of hurricane season but it is not too late for businesses to prepare for the threat of a potential disaster that can interrupt normal businesses operations and cause millions of dollars in damages and lost revenue. In fact, by taking action now, businesses cannot only avoid the avalanche of storm-prep stress that descends on Floridians as soon as high winds threaten our shores, they can also be better prepared to recover and rebuild after a storm passes.
Following are just a few things that businesses should consider as part of a well-thought-out disaster-preparedness and business-continuity plan.
- Develop an emergency plan or review and update last year’s plan based on changes in circumstances, personnel, etc.;
- Review your property insurance and business interruption policy, and understand the terms, policy limitations, exclusions and other loss considerations. Up-front preparations can help you to mitigate losses and more quickly recover lost revenue;
- Update contact information to help you communicate with employees, vendors, customers and any other people your business relies on for maintaining and sustaining normal operations;
- Ensure records of inventory, orders and events are up-to-date;
- Confirm accuracy of historic, current and projected financial data, including balance sheets, profit and loss statements, budgets;
- Document valuables, including taking photographs and video of business assets, such as real estate, equipment, machinery;
- Create and store in a safe place (such as the cloud) electronic copies of important business documentation and inventory of assets; and
- Have data duplication, backup and recovery systems in place to help you access files and restore data as quickly as possible.
The forensic accountants with Berkowitz Pollack Brant have extensive experience helping businesses prepare for, document and defend commercial insurance claims that result from natural or man-made crises.
About the Author: Daniel S. Hughes, CPA/CFF/CGMA, CVA, is a director with Berkowitz Pollack Brant’s Forensics and Business Valuation Services practice, where he helps companies of all sizes assess economic damages, lost profits and the quantification of business interruption insurance claims. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.
Individual taxpayers who suffered losses to their homes and personal belongings during the 2017 hurricane season should be aware that the IRS introduced safe harbor methods to calculate those losses on their 2017 income tax returns that they will file in April of this year.
Under the IRS guidance issued in December 2017, taxpayers with casualty losses of $20,000 or less may use an Estimated Repair Cost Method by using the lesser of two repair estimates prepared by two separate, independent and licensed contractors to determine a property’s decrease in fair market value (FMV). The estimates must detail the itemized costs required to restore the property to the same condition it was in immediately before the casualty event. Any improvement costs that would increase the property’s value above its pre-casualty condition must be excluded from the calculation.
For casualty losses to personal-use residential real property and personal belongings of $5,000 or less, taxpayers may rely on a De Minimis Safe Harbor Method under which they may use a good faith estimate of the cost of repairs required to restore the real property to its pre-casualty condition and the decrease in the fair market value of the individual’s personal belongings. Under this method, taxpayers must maintain meticulous records describing the affected real and personal property and detailing the methodology used for estimating the loss.
The Insurance Safe Harbor Method allows taxpayers to rely on reports from their homeowners’ or flood insurance companies that estimate the amount of losses they sustained to personal-use residential real property.
In addition to these safe harbor methods, individuals who suffered casualty losses to personal-use residential property as a result of a federally declared disaster may use the following methods: (1) the Contractor Safe Harbor Method under which the taxpayers may rely on contract price for the repairs specified in a binding contract prepared by a licensed independent contractor and signed by the individual and the contractor, or (2) the Disaster Loan Appraisal Safe Harbor Method, which allows taxpayers to use the estimated loss contained in appraisals prepared for the purpose of obtaining a Federal loan or loan guarantee from the Federal Government. To determine the amount of casualty or theft losses for personal belongings located in a federally declared disaster area, individuals may also use a Replacement Cost Safe Harbor Method that relies on a table that values the property based upon such factors as the amount of time the individual owned the property prior to the casualty event.
In a separate IRS announcement, the agency detailed safe harbor methods to specifically help victims of Hurricanes Harvey, Irma and Maria determine the amount of losses these storms inflicted on their homes located in Texas, Louisiana, Florida, Georgia, South Carolina, Puerto Rico, and the U.S. Virgin Islands. The calculations are based on cost indexes that consider the size of a home as well as the location and extent of its damages.
It is important to note that the IRS issued this updated guidance in December 2017, just prior to the passage of Tax Cuts and Jobs Act, which overhauls the tax code beginning on Jan. 1, 2018. The new law limits the tax break for personal casualty losses to those damages that result from a disaster declared by the president of the United States. On the surface, it appears that victims of major disasters, such as hurricanes and other federally declared disasters, would still be allowed to deduct personal casualty losses in the future, while homeowners affected by fires, flooding, winter storms and other casualty and theft events may no longer benefit from this form of tax relief. However, the actual implications of the new law will not be fully known until later this year when the IRS issues technical guidance on how it will address the provisions of the new tax law.
With offices in South Florida, Berkowitz Pollack Brant is well aware of the complicated tax and insurance issues individuals and businesses face when preparing for and recovering from natural disasters, such as hurricanes. Our advisors and accountants work closely with clients to insure and support claims of business interruption and assess of damages to property and businesses for purposes of claiming casualty loss tax deductions.
About the Author: Arkadiy (Eric) Green, CPA, is a director of Tax Services with Berkowitz Pollack Brant, where he works with real estate companies, commercial and residential developers, property management companies, real estate investors and high-net-worth individuals to structure investments and complex transactions for maximum tax efficiency. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.
With hurricane season upon us, businesses in South Florida and all along the east coast should have an emergency plan in place to safeguard their organizations before and after a disaster occurs.
What types of situations can impede normal business operations? How can a business protect itself from these events, which may include power outages, burst water pipes, server failures, data hacks, fires, floods or acts of nature? How can a business mitigate its losses following a disastrous event? What does the business need to do to recover in a timely manner, if recovery is even possible?
Answering these questions in advance of a potential threat can help businesses be better prepared to act quickly and reduce their risks of interruptions in normal business operations. Following are a few critical factors businesses should consider when preparing a business continuity and disaster-recovery plan.
Employees. How will a business communicate with its workers and their family members during and after a disastrous event? Which business functions and staff members will be required during the preparation and recovery periods?
Businesses should maintain up-to-date contact information for all of their employees and put into place a system for sharing information with them. In the wake of recent disasters involving power outages and overloaded telephone networks, text messaging has proven to be an effective communication tool. In addition, businesses should ensure that critical employees know their roles and responsibilities to carry out the business’s emergency plan. Similarly, the business should be prepared to assign backup staff to cover for those workers who may be unreachable or unable to return to work following a perilous event.
Customers. Businesses that cannot respond to customers’ immediate needs are likely to lose those customers. To build trust and loyalty, businesses should communicate their emergency plans to customers before disasters strike and have in place a plan for communicating with them and providing them with alternative arrangements in the wake of a disaster.
Suppliers and Vendors. Interruptions in the supply chain can cripple a business when its vendors or suppliers are unable to deliver required services, products and materials. As a result, businesses should first consider whether or not their existing suppliers have business-continuity plans in place and whether such plans should be a requirement of their working relationships. In addition, businesses should have at the ready a backup list of pre-vetted suppliers who can step in to fulfill their orders in a timely manner.
Critical Business Functions. What activities are vital to a business’s survival? Critical business functions include those assets that are required to resume operations and those activities whose interruption will result in a loss of revenue and noncompliance with industry and governmental regulations. Businesses must prepare contingency plans in the event a disaster debilitates these functions.
Documents and Data. All businesses should have backup systems in place to retrieve and restore data in order to resume normal operations. This may include keeping duplicates of important records off-site, downloading them onto portable storage devices, such as external hard drives, or saving them to cloud-based applications. Similarly, businesses should regularly update their accounting and operational data, including records of inventory and sales as well as forecasts of future performance, in order to quantify and substantiate incurred losses.
Insurance. Property insurance typically covers costs to repair physical damage. Companies located in regions that are prone to hurricanes, earthquakes, tornadoes or floods should also consider investing in business-interruption insurance to cover the potential loss in income due to an inability to continue normal operations in the aftermath of a covered catastrophe. In fact, in today’s environment of frequent cyberattacks and data breaches, weather conditions and natural disasters are far from the only factors that can impede business operations and lead to monetary and reputational losses. Business interruption insurance helps organizations mitigate these losses and quantify and substantiate claims of lost earnings.
The professionals with Berkowitz Pollack Brant’s Forensic Accounting and Business Insurance Claims practice have more than three decades of experience helping organizations of all sizes and in all industries prepare for and maximize financial recovery from insured perils.
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 helps companies of all sizes assess economic damages, lost profits and the quantification of business interruption insurance claims. He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.