What If You Lose Business Records in a Disaster?

How to Recover Business Records

Business Records Lost
Business Records Lost. Stephen Swintek/Getty Images

What happens if you lose your business records in a disaster? It's a double whammy. You have two problems here:

First, you don't have the records to support tax deductions in general and, 

Second, you don't have records to support losses due to the disaster. 

Supporting Tax Deductions when Documents are Unavailable 

The IRS requires taxpayers to provide records to support business tax deductions. If you don't have business records to support deductions, and you are audited, you have a dilemma.

Tax regulations state that "unavailability of a taxpayer’s records does not relieve the taxpayer of the burden of demonstrating his or her entitlement to deductions claimed." 

You will need to attempt to reconstruct those lost business records. But if the records have been lost or destroyed in a business disaster, what do you do?  

Supporting Disaster Damage when Documents are Unavailable

In the case of a disaster that damages your business records, follow a two-step process. 

First, document that the disaster occurred. In a recent (2014) Tax Court case, the Court faulted the taxpayer because he had never reported the disaster. In this case, a taxpayer claimed flood damage had caused his business records to be un-recoverable, but he did not document the flood damage with an insurance claim or other evidence. If you can't prove the records were lost or destroyed, the IRS may assume you didn't have them in the first place.

 

The best way to document a disaster is to file an insurance claim. Even if you live in a disaster zone, the IRS has no way of knowing if your business suffered a loss unless you put the loss in writing. 

How to Document Business Losses 

You will need your asset records to document the losses to business assets, including vehicles, equipment, furniture and fixtures.

Report casualty losses on your business or personal tax return. IRS Publication 547 describes the process for determining deductions for losses, including reduction in fair market value.

Per the Tax Court case mentioned above, if your business records are lost or destroyed you must make a "serious and persuasive effort" to reconstruct your business records. 

Reconstructing Records After a Disaster

The IRS has an excellent publication which discusses how to reconstruct your records in the event of a loss from a disaster.  

To report business and income-producing property losses, you will need:

  • IRS Form 4684 to report losses on business property (see Section B), and
  • IRS Form 4797 to record losses on sales of your business.

On these forms, you must provide the "cost basis" and "adjusted basis" for any property your business owns.

Can you do this? Do you have records that show what you paid for this stuff?  

Protecting Business Records From Disaster

Of course, the best way to assure that your business records survive a disaster is to protect them before the disaster strikes.

 Back up records and take them to a safe place, away from your business. Back them up online, too. 

Read more about how to protect business records from disaster loss. 

What to Do Now Before Disaster Strikes Your Business

1.Set up your business record keeping system so you have all of the records you need for tax purposes. 

2. Make your business records safe from disaster, as much as possible. 

3. Back up your records. 

For More Information

Source: T.C. Summ. Op. 2014-75 (PDF) 

IRS references you may find helpful: 

IRS Publication 547: Casualties, Disasters, and Thefts

IRS Publication 584-B: Business Casualty, Disaster, and Theft Loss Workbook

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