Understanding the IRS Disaster Tax Relief Program
In light of the devastating fires and other disasters we’re experiencing in California, many businesses may be poorly positioned to carry on business as usual. Fortunately, there is a grain of good news to share that may ease the way forward. Last year, the IRS announced a disaster tax relief program for qualifying businesses, giving organizations extra time to file and pay. Some entities may also be able to claim a casualty loss deduction on their current return or apply it to a prior-year return, which should be taken advantage of if the company has been inordinately affected by a major disaster in recent years.
The relief program applies to taxpayers in all states, not just California. In any case, it should be welcome news and something you should speak to your tax preparer about before you file.
While you may be consumed with recovery following a disaster, the tax relief program may ease the pressure as you get yourself and your company back on track.
What is the IRS Disaster Tax Relief Program?
Under the program, you may be eligible for tax relief if a disaster is recognized and covered by FEMA and your business or its activities are located/conducted within a declared disaster zone.
FEMA is a federal program that helps people and communities recover from disaster, providing legal, technical, and financial assistance to those who qualify.
Key Benefits of the Program
Some of the disaster tax relief benefits offered under the program include:
· More time to file
· Extra time to pay
· Receive faster refunds
· Apply credits to previous tax years
· Waived penalties
· Fees waived for reopening previous year’s returns
· Eligibility for casualty loss tax deduction for lost or damaged property
· Deductions for disaster-related economic loss
What Types of Disasters Are Covered?
Covered natural disasters must be federally recognized and responded to by FEMA.
Examples of current federally-recognized disasters or emergencies include:
· California wildfires
· Wildfires in general
· Hurricane Helene (Georgia, South Carolina)
· Tropical Storm Helene (North Carolina)
· Post-Tropical Storm Helene (West Virginia)
If you are unsure, FEMA offers a handy search tool to find relevant information about current and past disasters in your region.
Additionally, the SBA offers disaster loans and grants to taxpayers in disaster areas. Funding under the SBA program can cover physical loss or damage, funding to mitigate future losses, coverage for economic injury and loss, and more.
Who is Eligible for Disaster Tax Relief?
To qualify, you or your business must be current with tax filing. Disaster tax relief is available to individuals, businesses, sole proprietors, and any shareholder in an S-Corp.
Sometimes, you do not have to reside in a disaster area to qualify. Entities with tax records necessary to meet deadlines or records needed to perform certain business-related acts physically located within a disaster area may also be eligible. Examples could include physical records or virtual storage/servers destroyed in whole or part by the disaster. It could also apply if the business’ tax preparer cannot file because they or their records are located within the disaster area.
As for shareholders in an S-Corporation, if the S-Corp cannot provide you with the information you need to file, your returns can be postponed in alignment with the corporation’s extended deadlines.
The IRS also recognizes disaster tax relief eligibility for individuals injured or killed in or because of the disaster, such as if the business owner lost their life or was injured or became ill because of the disaster.
How to Access Disaster Tax Relief
To get started, you must first verify disaster declarations to find out if you or your company are eligible. Check the FEMA site and use their regional search tool to locate the incident. Each disaster will have an identifying number.
Required forms and documentation
You may claim disaster-related losses on Form 1040 for current tax years. Losses must be reported on Form 4684, which must be filed along with your 1040.
If amending a previous return, use Form 1040-X. The tax year amended must coincide with the year the disaster was declared.
Please note that if you are amending a previous return to account for disaster loss and have received an insurance payout, you must reduce the claimed amount accordingly, including all reimbursements.
Regarding payouts and reimbursements received later for amounts you have already deducted from a previous filing, there is no need to amend the return. Simply report the reimbursement as gross income.
If you require assistance with filing, please book a consultation; we’d be happy to help!
Tips for Managing Disaster-Related Tax Matters
Recovering from a disaster is never easy. Suffice it to say you may be consumed with reorganization and figuring out how to move forward. Nevertheless, it’s vital to maintain accurate records of losses and expenses as these can be leveraged to reduce your taxes and take advantage of the benefits available to you under the disaster tax relief program.
Seeking support from qualified tax professionals is highly recommended. IRS helplines are also excellent resources, whether you do your own taxes or not.
Stay updated on IRS announcements for specific disasters. The IRS maintains a webpage with current information on disaster relief and associated tax concerns. Check it regularly to access changes and updates that may affect you, your shareholders, or your organization.
Final Thoughts
We know how stressful disasters can be. In some cases, you may have lost everything and cannot envision a path forward. However, the IRS does not keep tabs on your status, and relief is not automatic. You must take action immediately to access whatever benefits are available to you.
It should also be noted that there is a difference between tax deferral and tax forgiveness. You must still file a return, even if your business has been destroyed. If you earned during the tax year, that income must be declared. Your taxes are not forgiven under the disaster relief program. Still, you may be entitled to significant deductions and tax credits to reduce your tax burden and get extended time to file and pay. These substantial features may help you establish sustainable pathways back to financial stability.
Act promptly to avoid additional stress—and know that help is available if you need it. Reach out to set up a call today. We’d love to show you how we can help.