Natural disasters—from hurricanes to wildfires to floods to earthquakes—tend to strike without warning and can have a severe impact on your small business. Not having a small business disaster preparedness plan can result in extreme physical and financial consequences. While the physical damage may be beyond your control, how well your business weathers the aftermath financially depends on whether you’ve created a robust disaster plan ahead of time.
Let’s review the main financial planning strategies for businesses to recover after a natural disaster. With a plan, you can mitigate the risks of disasters, leverage available tax benefits in federally declared disaster areas, and ensure your insurance coverage protects you when it matters the most.
1. Know the tax benefits for federally declared disaster areas.
When the federal government issues a disaster declaration for an area, both individuals and businesses located in affected cities and counties may be eligible for special tax relief measures. To find out if you are in a federally declared disaster area check the following: tax relief in disaster situations.
Generally speaking, federally declared disaster areas have more tax benefits than non-federally-declared disasters. Read more about what the IRS does for different types of disasters.
Individual Tax Relief Benefits
Business owners and employees will want to take note of the following if their area is declared a federal disaster:
- Casualty Loss Deductions – If your home, personal belongings, or vehicles were damaged/destroyed you may be able to deduct unreimbursed losses on your return.
- Losses must exceed $100 per event and must be greater than 10% of your adjusted gross income.
- Claim the loss on your current year return or amend the prior year return for faster relief.
- Extended Filing Deadlines – The IRS extends filing and payment deadlines for those affected. Connect with your accountant to find the new dates.
- Penalty Relief – The IRS may waive late filing and payment penalties for individuals in disaster zones.
- Access to Retirement Funds – Special provisions may allow you to withdraw or borrow money from your retirement accounts without early withdrawal penalties. These funds are required to be used for your disaster recovery.
- Temporary Housing and Relief Programs – IRS coordinates with FEMA and other agencies to provide financial assistance for temporary housing, repairs, and other essential services.
Business Tax Relief Benefits
Small businesses will need to keep these benefits in mind if an area is declared a disaster federally:
- Business Casualty Loss – Businesses can deduct losses from damaged or destroyed property. Losses can be claimed on the current or prior year return to accelerate refunds.
- Extended Filing Deadlines – Businesses may receive extensions for filing and the following payment deadlines may be extended:
- Income tax
- Payroll tax
- Excise tax
- Penalty Relief – IRS may waive late filing and payment penalties for individuals in disaster zones.
- Employee Retention Credit for Disaster Zones – Some disaster zones allow businesses to claim a credit for wages paid to employees while the business was no operating due to the disaster. See Form 5884-A.
- The maximum credit is $2,400 per employee.
2. Understand your insurance.
Small business disaster recovery can be relatively painless or very painful depending on how much your insurance covers different disaster types. Now, when no disaster is taking place, is the time to fully understand your policies:
- Homeowners, Renters, and Commercial Property Insurance
- Ensure your policy covers the replacement value of any property, equipment, or inventory that has been destroyed/damaged.
- Adjust coverage limits for inflation or renovations.
- Some disasters may require separate policies, so it is important to understand your exclusions.
- Floor and Earthquake Insurance
- If you are at risk of floods and earthquakes, it is highly recommended to purchase separate policies.
- Auto Insurance
- Ensure that you have comprehensive coverage to protect your vehicle against any floor or storm damage.
- Liability Insurance
- For businesses, liability insurance protects you against lawsuits related to injury or damage to your property during or after a disaster.
3. Go paperless and create backups.
Make sure that your company’s data and information have multiple backups, and that your reports, paychecks, and other important documents aren’t entirely on paper. FEMA recommends secure cloud storage, but each business has different needs!
It’s recommended to have secure versions of paperwork like insurance policies, business account information, medical information, and important points of contact in a water-tight container or online.
4. Get acquainted with SBA loans, local funds, and other financial assistance programs.
Naturally, the best advice in these situations is to create a classic “rainy-day” savings account just for emergencies. The old “rule of thumb” is about ten percent of annual revenue or three months of expenses. We definitely recommend this; however, not all business can feasibly have a large account covering several months’ worth of operations. For those who need quick assistance, here are some options to consider:
- Disaster Assistance Loans: The U.S. Small Business Administration disaster assistance can be a lifeline to many businesses across the country.
- Short-term Loans: In the rush and stress of a natural disaster, many scammers rush in to fill the void with bad deals promising free money. Make sure your loan is backed by the SBA or other federally recognized organization.
- Free Resources: Organizations such as the Red Cross often offers free assistance to affected communities.
- State/Local Resources: Your state’s emergency management agency may also offer local assistance or even tax benefits.
5. Train your employees and create a plan together.
Often the survival of a small business during a natural disaster depends, not on the owner’s best intentions, but on the employees’ knowledge and training. For example, do all of your employees know what your flood insurance requires as “lose avoidance measures” and how to accomplish this? Do your managers have a phone tree of their employees to let them know they’re not required to come in in a dangerous hurricane? Has anyone covered safe exits and entrances as required by OSHA?
These are some important free resources for shoring up these plans internally:
- Check out the latest of FEMA’s business resources, such as worksheets and checklists.
- Importantly, most businesses will need a business continuity plan (BCP).
- Download the Disaster Resistant Business free workbook.
- Read OSHA’s write-ups for different types of disasters.
- Rate your own business using the Red Cross’s self-assessment.
If you have questions about how this topic will impact you, Team LittleOwl CPA is here to help. Schedule a discovery call today!
