Disaster Planning: Expect the Unexpected
Along with warm temperatures, summer can bring natural disasters. It's currently hurricane season along the Atlantic and Gulf coasts, severe storm season in the Midwest, flood season along the Mississippi River, and wildfire season in the Southwest and West. When disaster strikes, affected individuals and businesses may incur substantial financial losses. However, some losses can be mitigated with proactive planning.
Covering Your Assets with Insurance
Insurance is the most obvious way to hedge against natural (and man-made) disasters. But many individuals and business owners don't bother to read the fine print of their insurance policies until after disaster strikes. Unfortunately, that may be too late.
Damage caused by events such as fire, lightning, windstorms and hail is part of most homeowners policies. But if you live in an area prone to earthquakes and floods, you should know that homeowners insurance generally doesn't provide protection. You'll need to buy separate coverage for these perils or add an endorsement to your current homeowners policy. Also note that homeowners insurance and flood insurance won't cover drain backups or drainage problems in your foundation that might cause water damage in your basement.
In addition, homeowners policies may have limits on coverage for valuables, including antiques, art, jewelry, silverware and oriental rugs. You may need to pay for a special endorsement to your policy and obtain an independent appraisal to recoup the full replacement value of lost items.
Likewise, commercial property insurance doesn't typically pay for financial losses incurred while you're temporarily unable to reopen after a disaster. Instead, you'll need to add business interruption coverage as an addendum to your company's existing property insurance policy. This type of coverage allows a business to relocate or temporarily close so its owners can make the necessary repairs. In the meantime, business interruption insurance provides cash flow to cover revenues lost and expenses incurred while normal operations are suspended.
As with any insurance product, ask which disasters are specifically excluded from business interruption coverage. For example, it's common for this type of insurance to exclude damages from earthquakes and floods. However, you can usually obtain such coverage for an additional fee.
An insurance agent can help you understand the risks inherent to your geographic location, specific business and industry. Always read the fine print of the policy before you sign on the dotted line.
Safeguarding Your Records
A recent IRS news release reminds taxpayers to protect records — including bank statements, insurance policies, tax returns and copies of important documents (such as vehicle titles, home closing statements, passports and Social Security cards) — in case disaster strikes.
Here's a summary of the IRS guidance:
Go paperless. Increasingly, people are opting to receive bank statements, pay bills and store documents electronically. Doing so can also be a smart way for individuals and businesses to safeguard records from disasters. For example, important tax records (such as W-2s, payroll forms, tax returns and other paper documents) can be scanned into an electronic format and stored on a computer or cloud computing network. Electronic records may be easier to retrieve than paper records when a disaster occurs.
Back up electronic files. Be sure you back up your electronic files and store them in a safe, off-site location. This is a smart practice for individuals and businesses alike. Other options include copying files onto a CD or DVD. Many retail stores also sell computer software packages that you can use for recordkeeping.
When choosing a place to keep your important records, convenience to your home or office shouldn't be your primary concern. Remember, a disaster that strikes your home or office is also likely to affect other facilities nearby, making quick retrieval of your records difficult and maybe even impossible.
Inventory your assets. The IRS offers disaster loss workbooks for individuals and businesses that can help you compile a room-by-room list of your belongings or business equipment. In addition, you may want to photograph or videotape the contents of your home or business, especially items of greater value. These steps will help you recall and prove the market value of items for insurance and casualty loss claims.
Devise a comprehensive, updated disaster recovery plan. Start by brainstorming disasters common to your geographic area or industry. Then develop a plan that considers:
- Where to seek shelter from all types of hazards,
- How to safely evacuate your home or office,
- Where to obtain information from community warning systems and school districts,
- How to back up your computer data systems and where to store backup data, and
- How to communicate with family members, employees, customers and others when disaster strikes — and after.
You'll also need to assemble a survival kit that includes such items as: nonelectric telecommunication tools (for example, cell phones, radios and walkie-talkies), a portable generator, flashlights and batteries, water and nonperishable food items, and a first aid kit. Many households and businesses take the extra step of staging impromptu disaster drills to test their preparedness — this allows them to unearth weaknesses in their disaster plans before lives and dollars are at stake.
Starting (or Reviewing) Your Plans
Disaster always strikes when you least expect it. How quickly your household or business can recover after a disaster often depends on emergency planning done today. It's also important to review emergency plans at least annually, because your preparedness needs to change as your family or business grows.
Seeking IRS Disaster Relief
In the event of a disaster, the IRS is there to help individual and business taxpayers. They'll even help you re-create destroyed records. For example, you can request a copy of a tax return and all attachments (including Form W-2) immediately after a casualty. There's generally no fee for ordering a transcript of your tax return for the current tax year and returns processed in the three years prior.
The IRS may provide additional relief to taxpayers in federally declared disaster areas. For example, the IRS may postpone certain filing, payment and other time-sensitive deadlines, waive failure-to-deposit penalties, and abate certain interest or late filing and late payment penalties that may apply to individual or business taxpayers that reside in a federal disaster area.
In addition, affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will generally get the taxpayer an earlier refund. But waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors.
Taxpayers may deduct only personal property losses that are not covered by insurance or other reimbursements. To back up your casualty losses, keep fastidious records, including records of replacement expenses for such things as the roof, appliances, gas heaters and other equipment. These records don't need to be submitted to the IRS with your tax return. But they can help support your claims in case of an IRS inquiry.
In the first half of 2015, the IRS has identified the following three disaster situations:
- Kentucky victims of the April 2015 severe storms and flooding,
- Oklahoma victims of the May 2015 severe storms, tornadoes, straight-line winds and flooding, and
- Texas victims of the May 2015 severe storms, tornadoes, straight-line winds and flooding.
For more details on these IRS disaster relief programs and other types of casualty losses, contact your tax professional.
