Disaster Recovery

We are all taught to be prepared for a disaster. There are countless resources available to help you prepare for floods, earthquakes, tornadoes, and more. However, have you ever thought how you would recover after a disaster strikes? Did the tax returns make it in the important documents folder? How do you begin to file your taxes when you've lost your entire home? We're going to answers those questions and provide helpful info on ways to feel prepared for taxes when you're trying to rebuild everything else at the same time.

Reconstructing Records After a Disaster

Reconstructing records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. After a disaster, taxpayers might need certain records to prove their loss. The more accurately the loss is estimated, the more loan and grant money there may be available.

For taxpayers who have lost some or all of their records during a disaster, there are some simple steps to take that can help. The following information includes steps to take after a disaster so taxpayers can reconstruct their records and prove loss of personal-use and business property.

Reconstructing Records

Tax Records

Business Records

Casualty and Disaster Tax Losses

A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. If damage is to personal, income‐producing or business property, taxpayers may be able to claim a casualty loss deduction on their tax return.

Taxpayers generally must deduct a casualty loss in the year it occurred. However, if the property was damaged as a result of a federally-declared disaster, taxpayers can choose to deduct that loss on their return for the tax year immediately preceding the year in which the disaster happened. A federally-declared disaster is a disaster that took place in an area declared by the President to be eligible for federal assistance. Taxpayers can amend a tax return by filing a Form 1040-X, Amended U.S. Individual Income Tax Return.

Figuring Loss

Taxpayers may need to reconstruct their records to prove a loss and the amount of the loss. To compute loss, determine the following figures:

The decrease in fair market value of the property that resulted from the casualty or disaster.
The adjusted basis of the property – this is generally what was paid for the property, increased or decreased, because of certain events.

Taxpayers may deduct the smaller of these two amounts, minus insurance or other reimbursement. Additionally, certain deduction limits apply. See Publication 547, Casualties, Disasters and Thefts, for details on these limits and Publication 551, Basis of Assets, for additional information on basis.

If the casualty loss deduction causes a taxpayer’s deductions for the year to be more than their income for the year, there may be a net operating loss. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts.

Determining the Decrease in Fair Market Value

Fair market value (FMV) is generally the price for which the property could be sold to a willing buyer. The decrease in FMV used to figure the amount of a casualty loss is the difference between the property's fair market value immediately before and after the casualty. FMV is generally determined through a competent appraisal. Without a competent appraisal, the cost of cleaning up or making certain repairs is acceptable under certain conditions as evidence of the decrease in fair market value.

Generally, the cost of cleaning up or making repairs if the repairs are:

Actually made
Not excessive
Necessary to bring the property back to its condition before the casualty
Only made to repair damage
Not adding value to the property or making it worth more than before the disaster happened

Additional Resources

Disaster help resources from federal agencies:

DisasterAssistance.gov: Help with applying for FEMA disaster assistance and guide to resources.
FEMA disaster information: Resources include information on the disaster declaration process, types of disasters and how FEMA gets involved.
Ready.gov: Resources for planning ahead of disasters.

Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.