Natural phenomena such as floods, forest fires, hurricanes, tornadoes, and earthquakes pose unpredictable threats to life and property. When disaster strikes, the IRS has policies in place to attempt to ease the burden on affected taxpayers and businesses. But understanding your rights as a taxpayer would be a headache in the midst of an emergency. Read on to familiarize yourself ahead of the unthinkable with what disaster declarations do and don’t mean.
1. The IRS may only authorize relief for victims of disasters that have been recognized by the Federal Emergency Management Agency (FEMA).
The clearest way to qualify for disaster relief is to reside or have established a principal place of business in a qualifying area designated by FEMA. Taxpayers whose address of record is in an area qualifying for IRS disaster tax relief will automatically receive extra time from the IRS to file returns and pay taxes. For example, victims of the wildfires in Colorado earlier this year received an automatic extension of almost a month to May 16, 2022.
However, taxpayers who do not reside or do business in a disaster area may still qualify for relief if their tax records are stored in a designated disaster area. For example, if your tax preparer is located in a disaster area and unable to file or pay your taxes on your behalf, you qualify for relief. Similarly, a shareholder in an s-corporation or partnership qualifies for relief if they cannot obtain their tax records due to a designated disaster. But unlike those with an address of record in a disaster area, taxpayers who are affected by the storage of their records must request relief by calling the IRS’s Disaster Hotline at (866) 562-5227.
2. Taxpayers may deduct property losses that are not covered by insurance or other reimbursements.
For individuals, damaged or lost personal property can include homes, household items, and vehicles. However, losses on personal property are only deductible to the extent that they were not reimbursed by insurance. Taxpayers do not have to itemize their deductions to report these losses. Furthermore, taxpayers may choose whether to report the loss in the year that it occurred or on their prior-year return. Reporting the loss on the prior year is often more beneficial because it provides the funds from a refund more quickly.
Disaster loss rules are the same for renters and commercial property owners as they are for homeowners. For example, if a business loses a large piece of equipment with a tax basis of $100,000, and the insurance reimbursement was only $85,000, the tax deduction would be $15,000.
3. The Small Business Administration (SBA) offers financial help to business owners, not-for-profits, homeowners, and renters affected by disasters.
Help may include grants or low-interest loans. This influx of working capital is often enough for small businesses to weather the economic injury caused by a disaster.
Once again, the person or entity must be in a designated disaster area. In addition to FEMA, the President of the United States and the Secretary of Agriculture may make disaster declarations for purposes of SBA programs. The SBA website maintains a search feature for currently qualified disaster areas.
In Conclusion
According to the National Center for Environmental Information, Americans have experienced 310 natural disasters since 1980. The center estimates that the dollar value of damage from disasters has exceeded $1 billion (Consumer Price Index adjusted to 2021). Unfortunately, even taxpayers who never live through a disaster themselves likely know a friend or loved one impacted by the aftermath of a natural disaster. We hope that this brief overview of the special tax law provisions in place for victims of disasters provides some reassurance in the face of a crisis.
