As the dust settles
10/28/14 UPDATE: The Obama Administration has approved Individual Assistance (IA) Federal Emergency Management Agency (FEMA) disaster funds for areas in Napa and Solano Counties impacted by the August 24th earthquake. The Obama Administration also approved U.S. Small Business Administration (SBA) loans for homeowners, businesses, and nonprofit organizations. The Obama Administration had previously only approved FEMA disaster funds for Public Assistance (PA).
Learn more here.
The applicant guide is on the FEMA website.
We continue to hear reports both of property and business losses and the incredible outpouring of help and support from members of our community and organizations like the Napa Valley Vintners.
As we deal with unanswered questions about the level of support our community can expect from FEMA and other goverment agencies, there are steps you can take now. We offer this advice for businesses dealing with the cleanup and preparing for income tax and financial statement implications at the end of the year.
As with any type of expense or deduction, clear documentation is critical:
• Take inventory and get an accurate count of what has been damaged. Identify any items that can be salvaged or repaired. Be sure to dispose of any damaged items by the end of your 2014 tax year in order to deduct those losses this year.
• As you begin filing insurance claims, consider the valuation of any losses. Don’t accept an agent’s first assessment of bulk wine losses at the market rate. Consider the potential selling price of the wine less any costs to complete.
• Consider the excise tax implications resulting from any lost inventory.
• Be sure to talk with your banker about the potential impact of inventory losses on any loan covenants.
Accounting for inventory and other property losses
Create a separate account to use for tracking damaged inventory, equipment, art work, buildings, or other assets. Remember that these losses are valued as follows:
• Damaged inventory is written off at cost. (Costs are usually different for book and tax purposes.)
• Furniture, equipment and fixtures that are completely destroyed can be written off at net book value, which is cost less any accumulated depreciation.
• Buildings and artwork that are damaged are considered a deductible casualty loss and require an appraisal to support the damage. Any repairs to these assets will need to be kept separate from other repairs.
Add another account to keep track of cleanup expenses, repairs, or inspections resulting from the earthquake damage. If you bring in specialty services or additional part-time labor, don’t forget to keep track of those expenses and be sure to follow proper procedures for recording any compensation provided (and filing form 1099’s as needed.)
Insurance proceeds
If you receive insurance reimbursement for any losses, net the proceeds against the amount of the loss for book purposes.
For tax purposes, special rules may allow you to defer the recognition of any realized gains resulting from insurance reimbursement. Be sure to keep track of any proceeds and check with your accountant for details and information on the
timing of replacement assets.
Emergency and disaster declarations
We are currently operating under a California state of emergency proclamation issued by the governor.
Should a Federal Disaster be declared, there are numerous sources of aid and additional tax benefits that may available on both a business and individual level. For Federal tax purposes, there is an option to deduct federally declared disaster losses on your return or amended return for the immediately preceding year. The IRS provides some insights in this publication but be sure to consult your tax advisor for details.
There is a formal process for moving from a proclamation to a Federal Disaster Declaration.
According to FEMA, a Major Disaster Declaration usually follows these steps:
• Local Government Responds, supplemented by neighboring communities and volunteer agencies. If overwhelmed, turn to the state for assistance;
• The State Responds with state resources, such as the National Guard and state agencies;
• Damage Assessment by local, state, federal, and volunteer organizations determines losses and recovery needs;
• A Major Disaster Declaration is requested by the governor, based on the damage assessment, and an agreement to commit state funds and resources to the long-term recovery;
• FEMA Evaluates the request and recommends action to the White House based on the disaster, the local community and the state's ability to recover;
• The President approves the request or FEMA informs the governor it has been denied. This decision process could take a few hours or several weeks depending on the nature of the disaster. (The request was approved on Octboer 28, 2014.)