Victims of Natural Disasters Can Get Federal Tax Relief, Gov't Aid

Property owners and business owners who suffer damage or loss to their property or business as a result of a natural disaster--hurricanes, storms, floods, fires and the like--are eligible for tax breaks that will offset those losses, as well as aid from other charitable and government agencies.

"Taxpayers who live in areas most often affected by adverse weather--tornadoes, earthquakes, hurricanes--should be aware that that they have a number of important options under the tax law should disaster strike," said Mark Luscombe, CPA, attorney and principal federal tax analyst for CCH. "They should routinely plan for disasters by familiarizing themselves with the deductions and keeping their records in a safe place to ensure they have what they need for filing if their business is damaged."

What is Deductible?

In general, the IRS allows certain income tax deductions following a casualty, a loss of property resulting from a sudden, unexpected or unusual event. A taxpayer can deduct the new amount of actual property loss resulting from damage to, or destruction of, property.

To qualify for a casualty loss deduction, the taxpayer must prove to the IRS that a loss occurred, and that the loss was caused by a casualty. To support a claim, the property owner will need to provide:

• Proof of the nature of the casualty, when it occurred, and that the loss was a direct result of the casualty.
• If the property is depreciable (such as a car), depreciation allowed or allowable.
• Proof the taxpayer owns the damaged property, or is legally responsible for it.
• A description of the damaged property and its location.
• Salvage value of the property.
• The cost or other adjusted basis of the property.
• Amount of insurance reimbursement or other compensation received or expected to be received for property damage. This includes the value of repairs, cleanup and disaster relief without cost by agencies or others.

Taxpayers may also use the cost of repairs to the damaged property as evidence of the loss of value if they can prove that:

• The repairs are necessary to restore the property to its pre-casualty condition.
• The repairs do not cover more than the damage by the casualty.
• The amount spent for such repairs is not excessive. (Estimates from several reputable companies are recommended.)
• The repairs don't make the value of the property greater than it was before the loss occurred.

For those business owners who work out of a home office, there are additional aspects to consider before claiming home office casualty losses.

Also, don't forget to consider damage to the property that is an indirect result of the casualty. Destruction of doors, windows, plants and shrubbery are examples.

Note that these particular incidental expenses relating to a casualty are not part of your casualty losses:

• Treatment of personal injury
• Cleanup costs
• Temporary housing
• Car rental

Determining the Value of Your Property

Valuation of your property is of the utmost importance when determining the amount of loss sustained in the casualty. When tax time comes, you will need to be ready to provide your tax preparer with evidence showing the value of your property's pre-casualty value.

Acceptable evidence includes:

• Canceled checks, vouchers, receipts, purchase contracts and deeds.
• Losses claimed for the destruction of portraits, heirlooms, keepsakes, etc. must be related to their market value, not the replacement value, or sentimental value.
• If records have been destroyed, get an appraiser's opinion on the value of the property.

Usually, casualty losses are deductible in the year that they occur, regardless of when the damage is repaired or the property is restored.

However, if there is an action for reimbursement against another party, or an insurance claim, the year when the taxpayer can claim the deduction may be postponed.

What if You Are in an Official Disaster Area?

Special rules come into play if losses occur in an area determined by the president of the United States to be a "Disaster Area." In this case, a property owner can elect his or her losses in the year immediately before the tax year when the disaster occurs. This allows taxpayers who suffered losses early in 2004, for example, to get some quick relief by applying the loss to their 2003 tax bill if they are operating under a filing extension and have not yet filed their tax return for 2003.

Recent legislation has also provided greater access to tax-favored mortgage bonds for rebuilding homes in presidentially declared disaster areas.

Special Benefits for Business Owners

Small business owners also can take advantage of "involuntary conversion rules for disaster damage" that provide further assistance to business owners whose property was damaged, or involuntarily converted, in presidentially declared disasters. Property used in a business that is damaged by a natural disaster is eligible for non-recognition of gain under the law, which means that qualified replacement property can be purchased and the gain can be deferred, offering tax relief to disaster victims.

"This provides relief for businesses that are forced to suspend operations for a substantial time due to the property damage," said Luscombe. "In other words, if a business loses valuable customers during the suspension and the business fails, the owners may want to consider reinvesting their capital in a new business venture."

The provision is retroactively applicable to disasters for which a presidential declaration is made after December 31, 1994, in tax years ending after that date.

For more detailed information about your taxes during times of disaster, consult your local tax preparer.

Other Help Resources

Moreover, there are other options besides taking advantage of these tax laws. In addition to various state and local economic development programs, the federal government offers relief to disaster victims through various sources, including:

• Federal Emergency Management Agency (FEMA) -- This federal agency reports directly to the president and coordinates the efforts of other federal agencies in a number of emergency management related activities. In addition to providing disaster assistance information, the FEMA web site provides useful contact information and links to help you deal with disasters before and after they happen.
• U.S. Small Business Administration (SBA) -- The SBA plays a major role in providing disaster relief. The SBA web site provides more information on how to get help. Their web site also provides advice on what to do before a natural disaster hits. Its disaster loan program is the primary form of federal assistance for private sector disaster losses. The three types of SBA loans available are:
  1. Home disaster loans -- Loans are provided to homeowners or renters to repair or replace disaster damages to real estate or personal property.
  2. Business physical disaster loans -- Businesses of any size may receive loans to repair or replace damaged business property, including real estate, machinery, equipment, inventory and supplies. Non-profit organizations are also eligible for this relief.
  3. Economic injury disaster loans -- Low-interest loans for working capital are available to assist small businesses and agricultural cooperatives through the disaster recovery period. The only catch is that the loan applicant must not have any credit available elsewhere, except from government sources.
• U.S. Department of Agriculture (USDA) -- The USDA provides many types of assistance to farmers and other rural residents, as the result of natural disasters such as drought, fire, flood, storm, earthquake, hurricane, tornado, and volcanic eruption. There is also assistance available to producers who suffer losses as a result of crop or livestock disease or pest infestation.
• Department of Housing and Urban Development (HUD) -- This agency offers disaster relief and recovery assistance, primarily in the form of mortgage assistance and public housing efforts.

Posted August 17, 2004.