When Disaster Strikes
How prepared are you to emerge successfully from a disaster that affects your business?
September 29, 2011
With the recent presidential declaration as a disaster zone, the northeast will be faced with the onerous task of re-emerging from flooded houses and businesses damaged or destroyed by Hurricane Irene. Although the Internal Revenue Service (IRS), along with several states, has granted an extension of time to file tax returns until October 31, 2011 to those in the affected areas, the question remains as to how to document and calculate the devastating losses from this tragedy.
The best documentation of the damaged property would be date-stamped photos or videos. Photos documenting the damage as well as documenting the repair process during rebuilding would be excellent proof of damage and reconstruction. Evidence of related news stories and photos should be retained until three years from now in case of an audit, by which time memories may have faded. For expense documentation, you should keep invoices and cancelled checks as well as some type of log of any necessary reconstruction.
If any financial records are lost, the IRS is waiving its normal fee for copies of past tax returns. When a taxpayer’s records have been destroyed, the IRS may reconstruct income and deductions by other means. Traditionally, the IRS has honored the Cohan (Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930)) rule, allowing reasonable estimates based on historical or other empirical evidence. The Cohan rule allows a taxpayer to employ a reasonable method to estimate income and deductions, generally, when original documents are not available through no fault of the taxpayer. Under these extenuating circumstances, a reasonable approach to reconstructing data is usually allowed.
There are other areas to consider such as lost income due to destroyed or flooded work areas. Businesses with business interruption insurance may be able to recoup some of their losses through insurance claims. Records of all insurance claims filed should be retained.
Displaced employees may be eligible for unemployment benefits without the usual waiting period. These claims will not impact the employer’s unemployment tax rates negatively. Lost payroll records should be requested from your payroll company for your records.
In a perfect world, most of your financial records could be reconstructed. Replacing client files if not stored electronically, however, can present an enormous challenge. With hindsight always being 20/20, everyone affected can now see the wisdom of having a disaster policy in place to help minimize the impact currently being felt.
There will always be those few unscrupulous characters who will try to capitalize on a disaster by preying on those who have undergone devastating life experiences. When the chips are down, they surface to take advantage of the unsuspecting victims of tragedy.
There are some flood restoration companies approaching victims of hurricane damage with offers of restoration services in exchange for $10,000 cash up front! No reputable firm demands such types of advance payment, especially under these circumstances.
Avoid Becoming a Victim
Here are five tips that can help you avoid becoming a victim:
Be aware that all flood water is contaminated and has serious health implications. Institute of Inspection, Cleaning & Restoration Certification (IIRC)-certified professionals following proper Federal Emergency Management Agency (FEMA) and Environmental Protection Agency (EPA) standards should conduct all restoration work. Ask for credentials before you engage a contractor. Better to be safe than sorry.
After a disaster, it becomes easier to determine what should have been done to prevent losses of important documents and difficult to replace information. It sounds almost too simple, but maintaining backup computer files off the business premises can lessen the impact of most types of natural disasters. If a business location is physically destroyed, there is some consolation in knowing that the financial records can be recreated, especially for use in submitting insurance claims and filing tax-related documents.
A disaster recovery plan should be in place and should generally include some of the following provisions:
With proper advance planning, the devastating effects of a disaster, such as the recent hurricane, can be minimized by protecting important business assets.
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Mary F. Bernard, CPA, is director — income/franchise tax, at the Dallas, Texas-headquartered tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, RI-based Kahn, Litwin, Renza & Co., Ltd.