Business owners face the potential of losses when disaster strikes. Your property, inventory, contracts, and capital expenditures are at stake.
You also face the risk of losing important records, which are necessary for an IRS audit.
ALL these potential losses also amount to a loss of income.
Taxes aren’t the first thing business owners want to think about when facing a disaster. But taking account of losses and claiming tax deductions is an essential part of recovery.
Accounting is important not just in filing taxes but also to file insurance claims, bill clients, get loans, and deal with federal audits.
What’s a Business Disaster Loss?
A business disaster loss can arise from unforeseen events like floods, volcanic eruptions, forest fires, and earthquakes.
These are deductions for business owners affected by catastrophic events. The only ones eligible for deductions are those able to show complete records to the IRS.
These are also special types of tax-deductible loss incurred by taxpayers. It’s made for business owners living in areas designated as federal disaster areas.
When you lose your business records during a disaster:
- You won’t have the records to support tax deductions in general
- You will still have to pay more despite your losses
Defining an IRS Audit
An IRS audit is a review of a business’s accounts and financial information. It verifies that the reported amount of tax is correct.
Auditing always happens after a disaster. The IRS will take a look at your report and another third party’s report. The two reports should match.
According to tax regulations, “Unavailability of a tax payer’s records does not relieve the taxpayer of the burden demonstrating his or her entitlement to deductions claimed.”
The IRS will require you to provide records that support your business tax deductions. If you don’t have the business records needed to support deduction during the audit, then you won’t be qualified for the deductions.
Getting Ready for an IRS Audit
Disasters are unpredictable but preparation is always key to avoid or minimize loss– including your business records.
The IRS requires documentation for every deduction so you can be eligible for exemptions. It’s your obligation to provide the documents needed. Disasters won’t change the documentation requirement. It’s best to stay abreast with your records and securely keep copies online.
Check Your Online Backups
Upload everything. You should have an off-site backup system ready in case of an emergency. Make sure to record all your business files.
Stored in the cloud, your data is safe and out of reach of disaster.
Replace Important Business Reports
If you do lose important documents and you don’t have them stored online, your business reports should still be complete in case you’re called for an IRS audit.
Prepare online or paper copies of these documents.
- Business Contracts
- Business Insurance Policies
- Business Licenses and Permits
- Loan Documents
- Lawsuit Records
- Vehicle Titles
- Diplomas & Certificates
- Tax Records
If you lost these documents, you’ll need time to get them replaced.
Most businesses have electronic copies of their tax return stored in the cloud. But if you don’t have one, then contact the tax professional who prepares your tax returns. That person should have copies of tax returns prepared on your behalf.
If you use accounting software to track your inventory, then your records are probably backed up online. They might be retrievable from a computer or cloud storage.
But if you don’t use accounting software, you can start rebuilding your lost inventories by getting copies from suppliers.
You’ll easily get copies of your payroll records if you use a payroll service. But if not, request copies of your payroll tax deposits from the IRS and unemployment insurance agencies.
Ideally, you keep a record of this online so you won’t have to attempt to retrieve them from your clients. This can be one of the most challenging tasks to reconstruct your records. Most of the time, there’s no single place where you can get all your client’s records for accounts receivables.
You need to create a list of your clients and ask each of them for copies of the invoices you sent them.
Business Mileage Records
A record of your business mileage is always retrieved online. Ideally, most businesses have an electronic mileage log.
But if you don’t have one– and if your paper mileage log was destroyed during the disaster– then you can use your appointment book or online map tools to reconstruct your business mileage.
To get information about your business’s income, get copies of your bank statements. The deposits should reflect your sales for any given period of time.
Documenting Business Casualty Losses
You should take the following steps after a disaster to work on your document property losses:
- Take photos or videos after the disaster. This helps determine the extent of the damage.
- Get pictures and videos taken of your property before the disaster occurred.
- If there are no photos or videos available, sketch an outline of the inside and outside of your property.
Always Be Prepared
In this age of digital storage, disasters aren’t a valid excuse anymore for lost documents. Always back up your most critical data online– like major contracts, legal documents, financial statements, and customer documents.
If you need professional assistance in getting your business ready for disasters and IRS audits, contact Manay CPA!