What to Do About Financial Losses from Disasters

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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If your business property has been damaged or destroyed by Hurricane Irene, the Texas wildfires, or other similar events, 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.

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.

Tax Write-off

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).

For example, 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.

Low-Cost loans

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. 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 experienced a disaster recently, 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.