Deducting a business disaster on your taxes
by November 1, 2023
Thanks to our friend Deborah Sweeney at MyCorporation for this income tax related guest post. Please note: This blog was originally published in 2018. It’s since been updated for accuracy and comprehensiveness.
We Californians keep hearing threats of El Niño. The possibility of flooded streets, damaged homes, and, hopefully, putting a dent in this drought we’re in. So far, we’ve only had a couple very rainy days. With all this flood talk, we got to thinking about how natural disasters affect small businesses. An entrepreneur can only prepare for so many situations: upset customers, employees quitting, a sudden increase in sales, etc. But it’s a little tougher to plan for a natural disaster. Thankfully, small business owners are able to do some deducting on their taxes. After something as unexpected and unsettling as a disaster, you want all the help you can get in starting over and rebuilding. A tax deduction could help you save some money in the long run.
Here’s how:
Know if you qualify
Not just natural disasters qualify for the disaster deduction. In some cases, manmade disasters also apply. The disasters that qualify, as stated by the IRS are: hurricanes, earthquakes, drought, floods, vandalism, mudslides, tornadoes, storms, fires and burglaries. If your business has been affected by one of the above listed disasters, you will most likely qualify, but be sure to check the IRS deductibility guidelines just to be safe. Keep in mind that whichever disaster applies to you and your business, it has to have been a sudden event. A natural wear -down over time does not count, even if it is due to water erosion (that is not a flood). The IRS will catch on, and you are risking the chance of being audited otherwise.
Stay organized
In high-stress situations, the last thing on your mind is keeping neatly organized. Though keeping track of the amounts of damages, especially if it occurs far away from tax season, will help you get your return. Keep a folder (perhaps in the cloud where it will stay safe?) of damages and repair costs, receipts, insurance paperwork, anything you think may apply.
Calculate the amount
There is a bit of math that goes into calculating how much exactly you will get to deduct. First, grab that paperwork you’ve saved of the disaster information and pull out your total loss. Take that number and subtract 100 right off the bat. That number should be more than 10% of your adjusted gross income. Lastly, take that number and subtract any insurance you received from the disaster. And that’s what you’ll get to deduct on your taxes.
