Hurricane Ike - Tax and Insurance Benefits

Following is a great summary of ways to maximze your tax and insurance benefits as originally distributed by Gainer, Donnelly and Desroches.

The initial damage estimates for Hurricane Ike are $10 to $12 billion and may well increase significantly over that amount. Victims of the storm may be able to mitigate their damages through insurance coverage and tax benefits. These benefits are not automatic, however, and there are steps which affected persons must take in order to take advantage of these.

Insurance Recoveries

Secure the Site - Ensure that the site is secure and protected from further damage. For instance, if a window has blown out, you must cover that opening to stop rain or vandals from coming into the building and further destroying your property. Protection of property is required by virtually all insurance policies. It's recommended that the insured video the damage as soon after the loss as possible.

Notify the Insurance Company and Read Your Policy - Notification to your insurance company will get the process started. The insurance company will establish a claim number and assign a loss adjuster to your claim. Read and understand your insurance policy prior to meeting with the adjuster. Consult your insurance agent / broker for assistance and clarification. If you are not receiving help from your agent / broker, contact an attorney or a forensic accountant who understands insurance coverage. Asking the adjuster for assistance may not be the best course of action. Remember the adjuster works on behalf of the insurance company.

Develop a Preliminary Loss Estimate - This is a step often overlooked by insureds or a step which is left in the hands of the insurance company adjuster and his accountants. When an insured has a loss, it is an event that must be recognized by the insurance carrier. Insurers do this by establishing a "reserve," or initial estimate of the loss. The reserve is an important number because it establishes the expectation of the insurance company. It is important that the insured be involved in the initial estimates of the loss. The insured knows the facilities and the business operations much more intimately than anyone with only a few days of exposure does.

Obtain a Cash Advance - You can obtain a cash advance or a partial settlement from the insurer; if so, make sure that this is in writing and make sure it states that it is partial. Generally, in the case of a major disaster such as this one, insurance adjustors are relatively liberal in assessing damages such as property damage. However, make sure that you understand the total damages and benefits allowed in your policy before making a final settlement.

Adherence to Policy Claim Deadlines - Determine the deadline for making a claim under the policy, and take steps to meet that deadline or request an extension. Adjusters understand the need for more time and an extension of time is common. If an extension is given, get it in writing.

Establish a Loss Accounting System - If you are keeping a set of books, set up specific accounts for the expenses related to the claim. There are many ways to account for a loss, but a best practice is to make it simple, and establish a system which follows the normal day-to-day activities as closely as possible. As loss related expenses are incurred and invoices processed, the project manager or those in the field who are approving the expenses should code them according to whatever system is developed.

Property Damage - If your claim is for damaged property, review the policy to determine how the value is determined. If the claim is based on replacement value, get estimates from several established contractors (which is easier said than done in the storm's aftermath).

Business Interruption or Business Income - If the claim is more complicated, such as a claim for lost profits or loss of business, you may need the assistance of a professional to construct a damage model and assist with capturing all of the components of the loss.

Get Help - The recovery from a loss is a traumatic and potentially significant event. Additionally, the insurance claim process is complicated and time consuming. The insurance company will deploy adjusters, accountants, and engineers which deal with insurance claims every day; a best practice for the insured is to get help from professionals who specialize in assisting clients in the financial recovery from losses. The professional fees incurred as a result of the loss can be covered by the insurance policy with a "professional fee" or "claim preparation cost" endorsement.

Tax Benefits-Deadline Postponement

Postponement - For taxpayers affected by Hurricane Ike, the deadline for all Federal tax returns and some Federal tax payments due between September 7, 2008 and January 5, 2009 will be extended to January 5, 2009. This postponement includes corporate tax returns due on September 15, individual and partnership returns due October 15, and tax payments including estimated tax payments for 2009 and payments for 2008 liabilities. This does not include employment or excise tax payments.

What is Postponed -In addition to the postponement for filing federal tax returns and paying federal taxes, over 200 other tax actions are covered by this postponement. Also included are: Contributions to retirement plans, replacement of property in a tax deferred exchange (also known as a '1031 Exchange'), payments on an installment agreement for past taxes, filing Tax Court Petitions, and filing refund claims.

What is NOT Postponed-You still must file a tax return by October 15 in order to claim the Economic Stimulus Payment. This was not postponed.

Who is covered - Residents of many counties, including Harris, Galveston and Fort Bend, are considered to be affected by Hurricane Ike. In addition, taxpayers whose tax professionals are in these counties are considered "affected taxpayers."

State of Texas Returns - For Texas Franchise tax returns, there is no extension of the November 15, 2008 final deadline. However, Texas Comptroller Susan Combs has announced that businesses affected by Hurricane Ike may be granted an extension of up to 90 days to file other state tax returns due in September and October-for most taxpayers, these will primarily be sales tax returns. Unlike the IRS, this is NOT an automatic extension. Taxpayers can call (800) 252-5555 to request the extension.

Tax Benefits-Casualty Losses

Type of Loss - The amount of a deduction for a casualty loss depends on whether the loss is a business or a personal loss.

Personal Losses - For personal losses, the loss is the difference between the fair market value of the property immediately before and immediately after the casualty, unless the cost of the property is less than that difference. If the property is totally destroyed, the amount of the loss is the cost of the property. The loss must be reduced by any insurance proceeds. Then, for each casualty, the loss must exceed $100, and, the amount of the loss is reduced by 10% of your Adjusted Gross Income ("AGI").

Special Provisions, maybe - In the aftermath of Hurricanes Katrina and Rita, Congress passed a law which waived the $100 threshold and the 10% reduction for affected taxpayers. We understand that Congress again is considering passing a law which would waive these reductions for Ike victims.

Business Losses - Business losses are calculated the same way as personal losses, except there is no $100 threshold or 10% of AGI reduction, however, cost basis is used instead of cost. Cost basis is, generally, acquisition cost less accumulated depreciation.

Select a year - Since we are in a Presidentially-declared disaster area, this loss can be used on your 2008 return, or, on your 2007 return. If you have already filed your 2007 return, you can amend it. Therefore, you can select the year in which the loss will save you're the most tax.

Net Operating Losses - If your hurricane loss exceeds your taxable income, you may have a Net Operating Loss ("NOL"). This NOL can be carried forward and used against future income for 20 years, or carried back two years and used against past income to generate a refund.

There are many other considerations relating to casualty losses which are beyond the scope of this article, such as the effect of expected insurance proceeds, what happens if that expectation is incorrect, the amount of the loss to be used in the prior year, and how to handle multiple losses from the same casualty.

Insurance benefits, the effects of the tax deadline postponement, and the utilization of casualty losses are all complex matters. Unless you have some experience in these areas, and are comfortable with your outcome, we suggest you consult a professional with specific expertise in order to maximize your benefits.