What To Do About Financial Losses From Sandy
If your business property has been damaged or destroyed by Hurricane Sandy, you may be able to recoup some of your losses. Insurance, tax refunds and other recoveries, as well as low-cost disaster loans, can help you put things back the way they were and resume business.
First, FEMA’s website provides information on applying for assistance, survivor resources and Disaster Recovery Centers.
President Obama has signed emergency and major disaster declarations in 11 states and the District of Columbia. The states are: Connecticut, Delaware, Massachusetts, Maryland, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and West Virginia. Each declaration has a link to the state’s Office of Emergency Management and other useful links.
A Presidential Major Disaster Declaration puts into motion long-term federal recovery programs, some of which are matched by state programs and designed to help disaster victims, businesses and public entities.
An Emergency Declaration is more limited in scope and without the long-term federal recovery programs of a Major Disaster Declaration. Generally, federal assistance and funding are provided to meet a specific emergency need or to help prevent a major disaster from occurring.
Check for Potential Recoveries
Contact your insurance agent or insurance company immediately to begin the process of recovering on your policy. Proceeds from your insurance may help to make you whole again, or at least alleviate some of your difficulties. Make sure you understand what your policy does and does not cover. Look for exclusions for specific types of events, such as floods—exclusions mean you won’t be covered.
If you have business interruption coverage, you can receive funds to pay your expenses and even lost profits during the period that the storm closed you down. The policy may cover the cost of operating from an alternate location until yours is repaired.
If insurance or other reimbursements did not cover your property losses, you can deduct them. The deduction is the difference between the value of property before and after the casualty, but this amount cannot be greater than your adjusted basis in the property (usually what you paid for property, increased by capital improvements and decreased by depreciation).
Say your panel truck was totaled in the recent storm. Its value before the storm was $12,000—after the storm it was practically worthless (scrap value of $600). However, you had already fully depreciated the truck, so your basis was zero. You have no tax loss in this case. If your building was damaged (it cost you $16,800 to repair the damage and insurance did not pay anything) and your adjusted basis in the building is $346,000, you can use the repairs as the measure of your loss and deduct this amount.
For inventory losses, there is a choice on how to report the loss:
- Deduct the loss by increasing the cost of goods sold (properly reporting opening and closing inventories)
- Deduct the loss separately and eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory
Unlike losses to personal-use property, which have a $100 per occurrence reduction and a 10 percent-of-adjusted-gross-income floor, there are no additional limits on casualty losses for business.
Businesses within an area declared eligible for federal disaster relief can choose to deduct the loss in the current year or previous year. The choice usually depends on which year produces the larger write-off. If you want to claim the deduction on last year’s return but already filed it, simply file an amended return to report the loss. Check with FEMA to see whether you are in a disaster area.
A casualty loss to your business property may produce a net operating loss (NOL) that can be carried back to offset income in certain previous years. This can generate an immediate cash refund that you can use to rebuild your business.
Normally, the Small Business Administration (SBA) doesn’t make direct loans to small businesses—it only guarantees loans made by commercial lenders. However, if you need money to get back on your feet following a disaster, the SBA may have a loan to help you. It provides low-interest disaster loans to homeowners, renters, businesses and private, nonprofit organizations to repair or replace real estate, personal property, machinery and equipment, inventory and business assets that have been damaged or destroyed in a declared disaster.
There are two types of SBA disaster loans:
- Physical Disaster loans to replace damaged property
- Economic Injury Disaster loans up to $2 million to provide working capital
Both types of loans have low interest rates and are repayable over a period of up to 30 years.
Lessons for the Future
If you were affected, what lessons did you learn?
- Did you find out that your insurance coverage was inadequate? Meet now with your insurance agent to revise your coverage for better protection against future occurrences.
- Did you lack a disaster recovery plan to help you weather the storm? Make or update your plan.
- Did you have issues with cleanup? In cleaning up and getting back to business, be sure that your staff is safe. OSHA has a fact sheet on natural disaster recovery.