Most small business owners are simply not prepared if disaster were to strike their business, whether it’s in New Hampshire or elsewhere. At least there are some tax breaks if disaster does strike, and that’s what we’ll discuss here.
Small businesses are particularly vulnerable to the effects of a catastrophic event such as a fire, flood, tornado, most recently landslides, or other natural disaster. While business casualty and other types of insurance coverage are available, there will still be other losses that are not recoverable and leave your business facing a deficit.
Casualty covers a range of sudden, expected or unusual loss due to damage of property. Some typical events can include natural disasters like hurricanes, as well as acts of vandalism, theft, car accidents and embezzlement. Events that are not deductible include deterioration due to age, weather, termites and drought. Like any part of the tax code, there are a few exceptions including when a drought may be considered a casualty if the property damaged was used for a trade or business, or in a transaction for profit such as an investment in farmland,
Business inventory losses can be treated a few different ways. According to IRS Publication 584-B – Business Casualty, Disaster, and Theft Loss Workbook, the loss can be considered as a casualty loss described above. Conversely, the loss can be treated as part of the business’ goods sold. The loss against goods sold may help to reduce the business’ net income thereby reducing the amount of Self-Employment Contributions Act (SECA) taxes paid.
If the property was a total loss, then the value of the loss will depend on whether it was a business or personal property. If it was a business property, the calculation used must take the adjusted tax basis after the loss, minus any salvage value received. You’ll notice that FMV doesn’t come into the equation at all. Additionally, if more than one item was damaged by the casualty, each item must be calculated separately in order to take the deduction.
Once the calculations are done, be prepared to prove that your losses are: a) real (i.e. that you suffered a legitimate and provable loss), b) you had actual possession of the property, and c) any lack or insufficiency of reimbursement (typically by the insurance company) to cover the loss. That means that you’ll want to keep receipts and considering that casualty usually involves some type of catastrophic event like a hurricane, keeping a digital off-site copy of receipts ‘in the cloud’ is a great way to ensure that you’ll still have a safe, legal paper trail well after the event. Acceptable proof of theft can include witness reports from those who saw your property taken, police reports, and even newspaper accounts of the event.
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Copyright 2014 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire, with more than twenty- five years experience on Federal and New Hampshire issues affecting small business, and specializes in helping small business owners with bookkeeping, tax, and payroll services for a fixed monthly fee. Learn more about Steve’s exclusive SIX Step system developed for small businesses at www.appletreebusiness.com/map.