Protect Your Records Before A Disaster Strikes

It is easier, less time consuming, and more accurate to preserve data before a disaster strikes.

As this article is being written, there have been 12 consecutive days of destructive tornadoes to hit our country. Tuesday night, weather conditions prompted the National Weather Service to issue a rare tornado warning for New York City.

Floods, wildfires, hurricanes, tornadoes and other natural disasters happen quickly and often with little warning. No one can prevent these disasters from happening, and no geographic area is exempt from a weather disaster. As a result, all businesses and individuals should be prepared in the event of a disaster strike.

Here are some things you can do to help protect your financial safety should a disaster occur:

Update Emergency Plans

A disaster can strike at any time. Personal and business situations are constantly evolving. It is important to review your emergency plans annually.

Create Electronic Copies Of Documents

All businesses and individuals should keep documents in a safe place. This includes bank statements, tax returns, and insurance policies. This is especially easy now since many financial institutions provide statements and documents electronically. If original documents are available only on paper, scan them and save them to a DVD or CD, or store them in the cloud.

Document Valuables

It’s a good idea to photograph or videotape the contents of your home. This is especially true when it comes to items of value. Documenting these items ahead of time makes it easier to claim insurance and tax benefits if a disaster strikes. The IRS has a disaster loss workbook. Using this can help taxpayers compile a room-by-room list of belongings.

Know What Tax Relief Is Available In Disaster Situations

You should be aware that the Tax Cuts and Jobs Act modified the itemized deduction for casualty and theft losses. After Dec. 31, 2017, net personal casualty and theft losses are deductible only to the extent they are attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster.

Reconstruction Data After A Disaster

There may be times when records will need to be reconstructed after a disaster. Whether the lost or destroyed property is personal or business, here are some simple steps that can help:

Tax Records

Your tax preparer will likely have an electronic copy of your tax return. Also, free return transcripts can be obtained immediately by visiting the Get Transcript tool on IRS.gov, calling 800-908-9946 and following the prompts, or by using your smartphone with the IRS2Go mobile phone app.
To get transcripts of previous years returns by mail, file a Form 4506-T, Request for Transcript of a Tax Return.
To request copies of past returns by mail, file Form 4506, Request for Copy of Tax Return.
Write the appropriate disaster designation, such as “California Wildfires,” in red letters across the top of Forms 4506-T and 4506 to expedite processing and to waive the normal user fee.

Personal Residence And Real Property

Real property, also called real estate, is land as well as generally anything built on, growing on, or attached to land.

Take photographs or videos as soon after the disaster as possible. This helps establish the extent of the damage.
Contact the title company, escrow company, or bank that handled the purchase of the home to get copies of appropriate documents.
- Real estate brokers may also be able to help.
Use the current property tax statement for land-versus-building ratios. If not available, owners can usually get copies from the county assessor’s office.
Establish a basis or fair market value of your home by reviewing comparable sales within the same neighborhood. This information can be found by contacting an appraisal company or visiting a website that provides home valuations.
Check with the mortgage company for copies of appraisals or other information they may have about cost or fair market value in the area.
Review insurance policies, as they usually list the value of a building, establishing a base figure for replacement value insurance. For details on how to reach the insurance company, check with the state insurance department.
If improvements were made to the home, contact the contractors who did the work 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 the house before and after any improvements. See if any of them have photos taken at get-togethers.
- If there is a home improvement loan, get paperwork from the institution that issued the loan. The amount of the loan may help establish the cost of the improvements.
- For inherited property, check court records for probate values. If a trust or estate existed, contact the attorney who handled the estate or trust.

If no other records are available, check the county assessor’s office for old records that might address the value of the property.

Vehicles

Resources, available online and at most libraries, that can help determine the current fair market value of most cars on the road include:

Additionally, call the dealer where the car was purchased 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. If making payments on the car, check with the lien holder.

Personal Property

It can be difficult to reconstruct records showing the fair market value of some types of personal property. Here are some things to consider when cataloging lost items and their values:

Look on mobile phones for pictures that were taken in the home that might show the damaged property in the background before the disaster.
Check websites that can help establish the cost and fair market value of lost items.
Support the valuation with photographs, videos, canceled checks, receipts, or other evidence.
If items were purchased using a credit card or debit card, contact the credit card company or bank for past statements. Credit card companies and banks often provide user’s access to these statements online.

If there are no photos or videos of the property, a simple method to help remember what items were lost is to sketch pictures of each room that was impacted:

Draw a floor plan showing where each piece of furniture was placed – include drawers, dressers, and shelves.
Sketch pictures of the room looking toward any shelves or tables showing their contents.
These do not have to be professionally drawn, just functional.
Take time to draw shelves with memorabilia on them.
Be sure to include garages, attics, closets, basements, and items on walls.

Business Records

To create a list of lost inventories, get copies of invoices from suppliers. Whenever possible, the invoices should date back at least one calendar year.
Check mobile phones or other cameras for pictures and videos taken of buildings, equipment, and inventory.
For information about income, get copies of bank statements. The deposits should closely reflect what the sales were for any given time period.
- Get copies of last year’s federal, state, and local tax returns. This includes sales tax reports, payroll tax returns, and business licenses from the city or county. These will reflect gross sales for a given time period.
If there are no photographs or videos available, sketch an outline of the inside and outside of the business location. Then start to fill in the details of the sketches. For example, for the inside of the building, record where equipment and inventory were located. For the outside of the building, map out the locations of items such as shrubs, parking, signs, and awnings.
- If the business was pre-existing, go back to the broker for a copy of the purchase agreement. This should detail what was acquired.
- If the building was newly constructed, contact the contractor or a planning commission for building plans.

Casualty And Disaster Tax Losses

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. If the damage is to income‐producing or business property, you may be able to claim a casualty loss deduction on your tax return. But deduction limits and other restrictions apply to personal casualty losses. Starting in 2018, net personal casualty losses are only deductible if they relate to a federally-declared disaster. In addition, taxpayers must enter the FEMA disaster number on Form 4684.

Usually, a casualty loss is only deductible in the year it occurred. But if the property was damaged as a result of a federally-declared disaster, you can choose to deduct that loss on your return for the tax year immediately preceding the year in which the disaster happened. If a return has already been filed, it can be amended by filing a Form 1040X, Amended U.S. Individual Income Tax Return. For this purpose, a federally-declared disaster includes any locality designated for either individual or public assistance. For a list of qualifying disasters, visit FEMA.gov/Disasters.

Figuring Loss

You may need to reconstruct your records to prove a loss and the amount of the loss. To compute loss, determine the following figures:

The decrease in the fair market value of the property that resulted from the casualty or disaster.
The adjusted basis of the property – this is generally what was paid for the property, increased or decreased, because of certain events. For business property, in particular, the adjusted basis may have been reduced substantially by depreciation.

You may deduct the smaller of these two amounts, minus insurance or other reimbursements. For more information, see Publication 547, Casualties, Disasters, and Thefts and Publication 551, Basis of Assets.

If the casualty loss causes your deductions to be more than your income for the year, there may be a net operating loss. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates and Trusts.

Determining The Decrease In Fair Market Value

Fair market value (FMV) is generally the price for which the property could be sold to a willing buyer. The decrease in FMV is the difference between the property’s FMV immediately before and after the casualty. FMV is generally determined through a competent appraisal. Without such an appraisal, the cost of cleaning up or making certain repairs is acceptable under certain conditions as evidence of the decrease in FMV.

Generally, use the cost of cleaning up or making repairs if the repairs are:

Actually made
Not excessive
Necessary to bring the property back to its condition before the casualty
Only made to repair damage
Not adding value to the property or making it worth more than before the disaster happened

Most importantly, it is easier, less time consuming, and more accurate to preserve data before a disaster strikes than to have to reconstruct it after a disaster.