Carol McAtee & Associates, CPAS
PREPARE FOR A DISASTER
As we go through the summer season, which includes hurricane season and increased risk for forest fires, tornados and other anomalies of nature, it is wise to make a plan to keep your records secure and accessible, whether you use a cloud based backup system or take advantage of the cloud based software programs such as QuickBooks Online, Drake Online Tax Software, or storage options such as DropBox or eFileCabinet. The IRS does not require that you keep a paper copy of your receipts and documents – an electronic copy is allowable – so use the scanning and online storage programs to maintain your document retention.
The following tips from the IRS can help you with establishing a document retention plan that will safeguard your books and records and/or help with recovery from disaster:
Use Electronic Records: You may have access to bank and other financial statements online. If so, your statements are already securely stored there. You can also keep an additional set of records electronically. One way is to scan tax records and insurance policies onto an electronic format. You may want to download important records to an external hard drive, USB flash drive or burn them onto CD or DVD. Be sure you keep duplicates of your records in a safe place. For example store them in a waterproof container away from the originals. If a disaster strikes your home, it may also affect a wide area. If that happens you may not be able to retrieve the records that are stored in that area.
Document Valuables: Take photos or videos of the contents of your home or business. These visual records can help you prove the value of your lost items. They may help with insurance claims or casualty loss deductions on your tax return. You should also store these in a safe place. For example, you might store them with a friend or relative who lives out of the area. DropBox and Facebook both provide a source for maintaining photos and videos.
Continuity of Operations Planning for Businesses: How quickly your company can get back to business after a disaster often depends on emergency planning done today. Start planning now to improve the likelihood that your company will survive and recover. Review your emergency plans annually. Just as your business changes over time, so do your preparedness needs. When you hire new employees or when there are changes in how your company functions, you should update your plans and inform your people.
There are real benefits to being prepared for disasters. The following preparedness strategies are common to all disasters. You plan only once, and are able to apply your plan to all types of hazards.
- Get informed about hazards and emergencies and learn what to do for specific hazards.
- Develop an emergency plan.
- Learn where to seek shelter from all types of hazards.
- Back up your computer data systems regularly.
- Decide how you will communicate with employees, customers and others.
- Use cell phones, walkie-talkies, or other devices that do not rely on electricity as a backup to your telecommunications system.
- Collect and assemble a disaster supplies kit. Include a portable generator.
- Identify the community warning systems and evacuation routes.
- Include required information from community and school plans.
- Practice and maintain your plan.
Update Emergency Plans: Emergency plans should be reviewed annually. Personal and business situations change over time and so do preparedness needs. Individual taxpayers should make sure they are saving documents everybody should keep including such things as W-2s, home closing statements and insurance records. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
Make sure you have a means of receiving severe weather information; if you have a NOAA Weather Radio (this is the most accurate, reliable source of information – do not rely on the commercial media), keep a supply of fresh batteries handy in their original container. These can be for both your communications needs and for flashlights. Make sure you know what you should do if threatening weather approaches.
The IRS has disaster loss workbooks for individuals (Publication 584, Casualty, Disaster, and Theft Loss Workbook) and businesses (Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook) that can help you compile a room-by-room list of your belongings or business equipment. This will help you recall and prove the market value of items for insurance and casualty loss claims.
One option is to photograph or videotape the contents of your home and/or business, especially items of greater value. You should store the photos with a friend or family member who lives away from the geographic area at risk. You can also contact friends and family who have been in your home and may have photographed holidays and celebrations.
These photos may also contain items in your home that you may have forgotten about.
Reconstructing Your Records: Reconstructing your records after a disaster may be essential for tax purposes, getting federal assistance or insurance reimbursement. Records that you need to prove your loss may have been damaged or destroyed in a casualty. While it may not be easy, reconstructing your records may be essential for:
- Tax purposes – You may need to reconstruct your records to prove you have a casualty loss and the amount of the loss. To compute your casualty loss, you need to determine: 1) the decrease in value of the property as a result of the casualty and 2) the adjusted basis of the property (usually the cost of the property and improvements). You may deduct the smaller of these two amounts, minus insurance or other reimbursement. See Publication 547 for further information on figuring your casualty loss deduction.If you repair damage caused by the casualty or spend money for cleaning up, keep the repair bills and any other records of what was done and how much it cost. You cannot deduct these costs, but you can use them as a measure of the decrease in fair market value caused by the casualty if the repairs are actually made, are not excessive, are necessary to bring the property back to its condition before the casualty, take care of the damage only, and do not cause the property to be worth more than before the casualty.
- Insurance reimbursement: Accurate reporting with the insurance carrier will facilitate the full payment of your claim for all losses incurred.
- Federal Emergency Management Agency (FEMA) and Small Business Administration aid – The more accurately you estimate your loss, the more loan and grant money there may be available to you.
The following tips may help to reconstruct your records to prove loss of personal-use or business property:
Personal Residence/Real Property
- Be sure to take photographs as quickly as possible after the casualty to establish the extent of the damage.
- Contact the title company, escrow company or bank that handled the purchase to obtain copies of escrow papers. Your real estate broker may also be able to help.
- Use the current property tax statement for land vs. building ratios, if available; if not available, get copies from the county assessor’s office.
- Check with appraisal companies to locate a library of old multiple listing books. These can be used for “comps” to establish a basis or fair market value. “Comps” are comparable sales within the same neighborhood.
- Check with your mortgage company for copies of any appraisals or other information they may have about cost or fair market value.
- Tax records – Immediately after the casualty, file Form 4506, Request for Copy of Tax Return, to request copies of the previous four years of income tax returns. To obtain copies of the previous four years of transcripts you may file a Form 4506-T, Request for Transcripts of a Tax Return. Write the appropriate disaster designation, such as “HURRICANE KATRINA,” in red letters across the top of the forms to expedite processing and to waive the normal user fee.
- Insurance Policy – Most policies list the value of the building to establish a base figure for replacement value insurance. If you are unsure how to reach your insurance company, check with your state insurance department at http://www.naic.org/state_web_map.htm.
- Improvements – Call the contractor(s) to see if records are available. If possible get statements from the contractors verifying their work and cost.Get written accounts from friends and relatives who saw your house before and after any improvements. See if any of them have photos taken at get-togethers.If a home improvement loan was obtained, obtain paperwork from the institution issuing the loan. The amount of the loan may help establish the cost of the improvements.
- Inherited Property – Check court records for probate values. If a trust or estate existed, contact the attorney who handled the estate or trust.
- No other records are available – Check at the county assessor’s office for old records about the property. Look for assessed valued and ask for the percentage of assessment to value at the time of purchase. This is a rough guess, but better than no records at all.
Vehicles
Kelley’s Blue Book, NADA and Edmunds are available on-line and at most libraries. They are good sources for the current fair market value of most vehicles on the road.
- Call the dealer and ask for a copy of the contract. If not available, give the dealer all the facts and details and ask for a comparable price figure.
- Use newspaper ads for the period in which the vehicle was purchased to determine cost basis. Use ads for the period when it was destroyed for fair market value. Be sure to keep copies of the ads.
- If you’re still making payments, check with your lien holder.
Personal Property
The number and types of personal property may make it difficult to reconstruct records. One of the best methods is to draw pictures of each room. Draw a floor plan showing where each piece of furniture was placed. Then show pictures of the room looking toward any shelves or tables. These do not have to be professionally drawn, just functional. Take time to draw shelves with memorabilia on them. Do the same with kitchens and bedrooms. Reconstruct what was there, especially furniture that would have held items — drawers, dressers, shelves. Be sure to include garages, attics and basements.
- Get old catalogs. These catalogs are a great way to establish cost basis and fair market value. Online catalogues change frequently and may not have the historical values. Many of the online retail stores still produce written catalogs that are mailed on a regular basis.
- Check the prices on similar items in your local thrift stores to establish fair market value. EBay or Craig’s List may also provide a resource to check pricing. Walk through the stores and look at comparable items, especially items such as kitchen gadgets. Look for odds and ends you may have had but forgotten because of infrequent use.
- Use your local “advertiser” as a source for fair market value. Keep copies of the issues handy and copy pages used for specific items to put with your tax records file on the disaster.
- Check local newspaper want ads for similar items. Again keep a copy of any you use for comparison with the tax file.
- If you bought items using a credit card, contact your credit card company.
- Check with your local library for back issues of newspapers. Most libraries keep old issues on microfilm. The sale sections of these back issues may help establish original costs on items such as appliances.
- Go to a used bookstore with a tape measure and the diagram of the destroyed property. Measure severalrows of used books and count the number of books per shelf. Add up the prices of those books and determine anaverage cost per shelf. Then count the number of shelves you had in your home and multiply by the average cost per shelf. This will help determine the value of your books before the loss.
Business Records
- Inventories – Get copies of invoices from suppliers. Whenever possible, the invoices should date back at least one calendar year.
- Accounts Receivables – one of the key components to getting your business up and running. An effective backup system of your customer records is critical to collecting outstanding monies. Your vendors will always contact you for payment, but your customers may not be so forthcoming.
- Income – Get copies of bank statements. The deposits should closely reflect what the sales were for any given time period. ° Obtain copies of last year’s federal, state and local tax returns including sales tax reports, payroll tax returns and business licenses (from city or county). These will reflect gross sales for a given time period.
- Furniture and fixtures – Sketch an outline of the inside and outside of the business location. Then start to fill in the details of the sketches. (Inside the building — what equipment was where; if a store, where were the products/inventory located. Outside the building — shrubs, parking, signs, awnings, etc.)If you purchased an existing business, go back to the broker for a copy of the purchase agreement. This should detail what was acquired.If the building was constructed for you, contact the contractor for building plans or the county/city planning commissions for copies of any plans.
The IRS has several resources available to help you plan for a disaster or information for disaster assistance:
• Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
• Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook
• Publication 547, Casualties, Disasters, and Thefts
• Publication 583, Starting a Business and Keeping Records
While there are a multitude of online services available to help with your document retention and retrieval, there are still circumstances that may require physical retention of important or irreplaceable documents. If your physical surroundings do not allow for a secure safe installation then invest in a safe deposit box. A disaster from natural
causes, fire, or other unforeseen circumstance may level the physical building but it does not have to dismantle your personal or business records. With a little planning and foresight most businesses can be up and running within a short period of time.
If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
