If you've suffered a financial loss due to a natural disaster, the IRS lets you deduct it on your tax return for the year in which the disaster took place or in the immediately preceding tax year if certain requirements are met. First, the loss must have taken place in an area the president declares in need of federal assistance. Second, the tax return for the preceding year must be amended by the date it's due or, if that date has already passed, by the tax return due date for the year of the disaster. Tax experts say the best way to determine which year to claim the disaster loss is to calculate for each of the years the tax effects of claiming the loss. Then select the one that is most beneficial to you.
Business owners should also be aware of a recent change in the Small Business Act of 1996 regarding losses caused by natural disasters. Under the act, business property damaged by a natural disaster is eligible for what's called "nonrecognition of gain." This means that qualified replacement property can be bought and the gain deferred.
"The law is designed to provide relief to businesses forced to suspend operations for a substantial time due to the property damage," says Mark Luscombe, principal federal tax analyst for CCH Inc., a Riverwoods, Illinois-based provider of tax and business law information. Often when a business needs to close temporarily, it loses customers and eventually folds.
As a result of the 1996 change, if a company loses customers during a suspension and goes out of business, the owner can reinvest capital from that business in an entirely new venture. This change is significant, says Luscombe, because in the past, a business owner had to reinvest in an identical business. Now he or she can start fresh with a different business. This provision applies retroactively to presidentially declared disasters made after December 31, 1994, in tax years ending after that date.