Stronger hurricanes, heavier and longer rains, raging wildfires. Natural disasters seem to be happening more often, but the loss of life is, of course, much more important than any other aspect of our home or business. While it currently seems that businesses and our economy have more than enough to deal with during COVID-19, natural disasters can wreak havoc on your business at any time, especially when they destroy vital paper tax records and documentation.
Although substantiating casualty-loss deductions after a disaster became tougher under 2017’s Tax Cuts and Jobs Act, reconstructing records after a disaster is important for many reasons. You’ll not only need detailed records to file your taxes, but also to file claims for insurance reimbursement. In some cases, you’ll also need them for proof of disaster-related losses, if you’re seeking recovery assistance through loans and grants.
How to reconstruct your records
First, document the disaster. Courts have taken a dim view of taxpayers who claimed losses in disasters, yet never filed a claim verifying that the disaster occurred. One of the best ways to document a disaster is to file an insurance claim.
Second, reconstruct your records. Even if they aren’t precise, putting the pieces together will go a long way toward verifying your good faith to comply with various filing requirements.
Tax records. You can get free transcripts of individual tax returns using Get Transcript on IRS.gov. A transcript summarizes return information, includes adjusted gross income, and is available for the most current tax year after the IRS has processed the return. Generally, transcripts are available for the past three years. Transcripts will not, however, provide state or local tax information.
Online is the fastest way to get a transcript; you should receive the document in 10 business days from when the IRS gets your request.
A copy of an actual return takes longer. You can request one by filing IRS Form 4506. In order to assist with reconstructing tax records, the IRS recommends that you request your federal return information for the four previous years.
Financial statements. If you’re using your bookkeeping software properly, obtaining financial statements should be a no-brainer, thanks to the cloud. Even desktop products now back up to the cloud if they are properly set up.
Property records. Contact the company or bank that handled the purchase of the property. For inherited property, taxpayers can check court records for probate values; if a trust or estate existed, taxpayers can contact the attorney who handled the trust. When no other records are available, check your county assessor’s office for old records that might address the value of the property.
Reconstructing records of the value of some business property sometimes involves verifying purchase costs. If you made improvements to your property, for example, the contractors who did the labor might be able to provide statements to verify the work and cost. Your mortgage company can also help verify the cost or fair market value, as well as provide records on appraisals performed on your property.
Inventory. Whether you operate a brick-and-mortar or 100% online business, chances are good that you had some kind of inventory, and now some of it may be gone or even under water. Don’t fret! Again, your accounting software should be able to help, as long as you use it or an integrated app to track inventory. In addition, the value of lost inventory can be verified with copies of invoices from suppliers, dating back at least one year. For capital expense items, office equipment and supplies, old credit card receipts and retailers’ current price lists can help verify value.
With property and vehicles, take photographs to establish the extent of damage. Before a disaster, another good method to reconstruct records of property, including office equipment, is to draw pictures of each room, showing placement of furniture and items on shelves and in drawers, including equipment and inventories. Outside your building, list shrubs, parking, signs, awnings and anything else of value that needs to be replaced.
Filing relief: Time could be on your side
The IRS and other agencies understand that a disaster can set you and your business back for months, if not longer. So, you may find yourself with a little extra time to reconstruct records. As emergencies are declared by the Federal Emergency Management Agency (FEMA), the IRS, for example, keeps careful track of disasters that affect taxpayers, and frequently offers filing and payment relief designated by state and county. For example, the IRS recently granted relief for taxpayers affected by Hurricanes Sally and Laura; Tropical Storm Isaias; wildfires in California and Oregon; storms in Michigan, Tennessee and South Carolina; and an earthquake in Utah.
Such relief usually postpones some filing deadlines, but not always payment, for estimated taxes, quarterly payroll, excise tax returns and, in some cases, penalties. Yet, not every location hit by a disaster eventually qualifies as a federally declared disaster area.
For more information, here is a short list of resources:
- IRS Disaster Assistance Hotline – (866) 562-5227.
- Visit IRS.gov and search for “disaster” for more information about reconstructing records.
- Government regulations on loss of records.