Tax Relief if Your Business Becomes a Disaster Victim

Blog content provided by Barbara Weltman, Publisher of Big Ideas for Small Business ®

With California wild fires raging and hurricanes hitting the U.S., now is the time for small business owners to become aware of tax relief they can use if disaster strikes them.

Business owners generally can write off the cost of property losses resulting from a disaster. But owners may incur special costs to get back into operation following a fire, storm or other disaster, and there are tax breaks to help if your business is located within a federal disaster area:

1. Deduction for certain qualified disaster cleanup expenses. Costs that would otherwise have to be capitalized (added to the basis of property and recovered through depreciation) can be currently deducted. These include costs for the abatement or control of hazardous substances that were released on account of a federally-declared disaster; debris removal or demolition of structures on real property damaged or destroyed by a federally-declared disaster; or for the repair of business-related property damaged by a federally-declared disaster.
2. Increased Section 179 deduction. For 2009, any profitable small business (no disaster required) can write off the cost of equipment and machinery purchases up to $250,000. For those affected by a federal disaster, this limit can be increased by up to $100,000, for a total write-off of $350,000.
3. Net operating loss. In general terms, net operating losses (NOLs) result when business expenses exceed income for the year. Such losses can be applied to prior years (usually two years) to give an immediate tax refund. However, for NOLs in federal disaster areas, there’s a five-year carryback period. This means losses from business operations in the year of the disaster can be used to offset income from the previous five years to generate cash that can be used for getting back to business.

You can find more information about disaster relief for businesses from the IRS website.

Idea: Review your insurance coverage with your agent to make sure any property losses that you could suffer will be covered; you may require special coverage if you are in a flood area or your policy excludes certain events. Also, consider carrying business interruption insurance, which is a policy that will help to pay your expenses while you are temporarily out of operation.

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