Unfortunately, things happen…fires, storms, vehicle accidents, landslides, volcanic eruptions, floods, and other disasters. There are on average 125 natural disasters in the U.S. each year, and there were 26 during the first quarter of this year. Will you experience a casualty event, and will that event receive disaster designation? Hopefully you won’t be a victim. But what if you are? Here are some of the steps you need to take to deal with a disaster and hopefully get back to business as usual. First, take a deep breath, and then…
Key steps to take
Get disaster assistance
The federal government has several programs to help businesses after a disaster. There may be state and local programs as well. On the federal level, you can:
Access a DRC. If your business experienced a disaster and need immediate assistance, you may be able to get help through a Disaster Recovery Center (DRC). To find a DRC near you, go to FEMA’s DRC Locator. Alternatively, you can text “DRC” and your zip code to 43362.
Register with FEMA. The first step is to register with Federal Emergency Management Agency (FEMA) to get into the system if assistance is needed. FEMA will provide a registration number, which is needed for SBA loans (explained next). Register by calling the FEMA hotline at 888-621-3362, creating a mobile account through the FEMA app, or going to DisasterAssistance.gov.
Apply for an SBA loan. You may qualify for a low-interest loan through the Small Business Administration (SBA). Find details at SBA.gov or call 800-659-2955.
- Business physical disaster loans. These are low-interest loans to small businesses through the SBA up to $2 million if losses are not fully covered by insurance. There are no application fees. The proceeds can be used to repair or replace physical assets (e.g., real property, machinery, equipment, fixtures, inventory, leasehold improvements). Proceeds can’t be used to upgrade or expand a business, except as required by building codes.
- Economic injury disaster loans (EIDLs). These are also long-term (up to 30 years) low-interest loans (not more than 4%) to small businesses through the SBA up to $2 million for businesses that experience an economic injury: (1) a business is directly impacted by a disasters, (2) it cannot cover expenses due to the disaster, or (3) it is physically located in a declared disaster area. The proceeds are for working capital and normal business expenses (e.g., the continuation of health care benefits, rent, utilities, and fixed debt payments). The proceeds can’t be used to expand facilities, buy fixed assets, repair physical damages, refinance debt, pay out dividends or bonuses, or pay back loans to business owners. Note: Once the application is completed, the SBA sends an inspector to estimate the cost of damage.
Deduct losses
If insurance and government assistance doesn’t cover all of your property losses, you can claim a tax deduction. Any casualty event (it doesn’t have to be a declared disaster) can be the reason for a deductible business loss.
Prior year return. There is an option to claim a disaster loss on the tax return for the prior year. This applies only to government-declared disasters. So, if your building is destroyed by a fire that resulted from bad wiring, this option doesn’t apply to you even though it’s a disaster to you. In contrast, if your business is destroyed by a wildfire receiving disaster designation, you can use this option.
- Before 2026, it has to be a federally-declared disaster.
- Starting January 1, 2026, state-declared disasters are accorded this same tax treatment as federally-declared disasters. State-declared disasters are those declared as such by governors (or the mayor for the District of Columbia).
Handle tax filings
If you experience a federally-declared disaster, you may have extra time to file federal tax returns and pay taxes. The IRS has a list of such disasters and the period of time that deadlines are extended.
Note: While state-declared disasters have the same tax treatment as federally-declared disasters explained earlier, they are not treated the same for all federal tax purposes. For example, they do not qualify for certain grants and loans that require a formal FEMA federal disaster designation. And state-declared disasters do not generate automatic extensions of time for federal tax actions (e.g., filing returns; making estimated tax payments).
Final thought
When disaster strikes, it can be challenging to think clearly and proceed with steps to get your business back on track. Now, before you experience a disaster, you might want to add the FEMA and SBA phone numbers to your contact list. Also review your insurance coverage, including the need to carry separate flood insurance if your location warrants it.
Make a disaster plan to help you get through one and recover. As the old Boy Scout motto said: Be prepared!
Additional blogs concerning disaster loss and recovery can be found in this list here.
