If your business has been hit with a disaster, like a hurricane, tornado, or blizzard, you need to be able to get back into business immediately. One important thing to consider when doing business disaster planning is how to store and recover your business records.
What happens if you lose your business records in a disaster? It's a double whammy. You have two problems here: First, you don't have the records to support tax deductions in general and, second, you don't have records to support losses due to the disaster.
Supporting Tax Deductions When Documents Are Unavailable
The IRS requires businesses (and individuals) to provide records to support their business or personal tax deductions. If you don't have business records to support deductions, and you are audited, you have a dilemma. Tax regulations state that "unavailability of a taxpayer’s records does not relieve the taxpayer of the burden of demonstrating his or her entitlement to deductions claimed."
You will need to attempt to reconstruct those lost business records. But if the records have been lost or destroyed in a business disaster, what do you do?
Supporting Disaster Damage When Documents Are Unavailable
In the case of a disaster that damages your business records, follow a two-step process.
First, it is important to document that the disaster occurred. In a 2014 Tax Court case, the Court faulted the taxpayer because he had never reported the disaster. In this case, a taxpayer claimed flood damage had caused his business records to be unrecoverable, but he did not document the flood damage with an insurance claim or other evidence. If you can't prove the records were lost or destroyed, the IRS may assume you didn't have them in the first place.
The best way to document a disaster is to file an insurance claim. Even if you live in a disaster zone, the IRS has no way of knowing if your business suffered a loss unless you put the loss in writing.
Documenting Business Losses
You will need your asset records to document the losses to business assets, including vehicles, equipment, furniture, and fixtures. Report casualty losses on your business or personal tax return. IRS Publication 547 describes the process for determining deductions for losses, the after-tax loss, and the reduction in fair market value.
You can also file for assistance with FEMA (the federal emergency disaster assistance agency), or file a disaster assistance claim with the Small Business Administration.
Per the Tax Court case mentioned above, if your business records are lost or destroyed you must make a "serious and persuasive effort" to reconstruct your business records.
Reconstructing Records After a Disaster
The IRS has an excellent publication which discusses how to reconstruct your records in the event of a loss from a disaster. On these forms, you must provide the "cost basis" and "adjusted basis" for any property your business owns.
Can you do this? Do you have records that show what you paid for this stuff?
Protecting Business Records From Disaster
Of course, the best way to assure that your business records survive a disaster is to protect them before the disaster strikes. Back up records and take them to a safe place, away from your business. Back them up online, too.
What to Do Before Disaster Strikes Your Business
- Set up your business record keeping system so you have all of the records you need for tax purposes.
- Make your business records safe from disaster, as much as possible.
- Back up your records.