Home » FOCUS » Accounting for Katrina casualty losses task for residents, CPAs

Accounting for Katrina casualty losses task for residents, CPAs

Not the least of the nightmares resulting from Hurricane Katrina is accounting. Literally tens of thousands of individuals and business owners lost their financial records in Katrina flooding. While there are tax breaks for those impacted by Katrina, it takes a great deal of work to recreate the records.

“People have a difficult time getting information together, and there is so much more information required in the tax returns,” said Stephen Theobald, managing director, Piltz Williams Larosa & Co., Biloxi.

For people who have lost everything, there are alternative ways of recreating financial records. Bank statement records can be requested, and closing statements from attorneys for purchases of homes or other property. But for the large part, most people are relying on their memory.

“The IRS requires that you must use the best records available, and if the only thing available is your memory, that is the best method available,” Theobald said. “I have an awful of lot of clients using their memory to document some of their losses. For homes, they will go in their memory from room to room, including closets. They are also using photos of the junk piled on the curb. And some are getting photographs from family members. Do the best you can creating an inventory and list not just what you originally paid, but what they are worth today. It is a mammoth task.”

The lists are necessary for insurance claims. Or, if insurance is not paying for the claims, the inventory is important to claim casualty losses on tax returns. The IRS has given both individuals and businesses until October 15, 2006, to file income tax returns for 2005 and for 2004 for people in the area who had filed for an extension until October 15, 2005. And while CPAs don’t recommend putting off filing if you can do it now, many people don’t yet have all the information they need.

“The reason for the extension is clients and CPAs are finding it hard to complete returns because it is so complicated dealing with casualty losses,” Theobald said. “In the past, less than 1% of the population might have had to deal with casualty losses. It is rare even for a tax professional to deal with a client with casualty losses. We don’t do it that often. Now, a large percentage of people have to document casualty losses.”

‘Overwhelming demand for information’

CPAs are swamped with the work. It isn’t just IRS returns made much more complicated by Katrina accounting and tax deductions for 2005. CPAs have also been helping with filing for insurance claims including business interruption claims, amending previous tax returns and working on SBA loan applications.

“There has been overwhelming demand for information,” Theobald said. “It has been an accounting nightmare.”
Adding to it is the fact that even people who normally do their own taxes are going to professionals this year. That is because the tax returns are much more complicated. Missing out on certain Katrina deductions could be very costly. For example, businesses that retained and paid employees while closed for Katrina repairs can receive an employee retention credit. And there are work opportunity credits for hiring a new employee affected by Katrina.

“It is essential to use a professional to do tax returns for 2005,” Theobald said. “There is a potential to lose a lot of money or do something wrong that would cause you to be questioned by the IRS. For the most part, you would miss out on deductions or credits. The problem, though, with hiring professionals this year is professionals are so overwhelmed, most of them are not taking on new clients. They can’t get to their existing clients in a timely fashion.”
Residents receiving the Community Development Block Grants for homeowners are advised to put off filing their taxes until they see how much grant money they will receive, said Amon Holcomb, enrolled agent, Holcomb Financial, Ocean Springs. Grant money has to be subtracted from casualty losses.

“It is a good idea if you are getting the grant money to wait to file,” Holcomb said. “If you are not getting grant money, you need to come in as soon as possible. Of course, if people owe money, they might prefer to put off filing until the deadline.”

Currently grants are going out to approximately 14,000 applicants who fit the criteria of owning their homes, having homeowner insurance but no flood insurance and not living in the flood zone. Later phases of grant money are expected to aid homeowners in other situations.

Holcomb said about 75% of his clients have heard of some type of tax break because the region was hit so hard by Katrina. He says the biggest problem beyond compiling a list of everything they lost is trying to determine the fair market value. For example, say you purchased a $2,000 computer system three years ago. What was the current value when it was lost? Holcomb said as a ballpark, something three years old might be valued at approximately 30% of the original cost.

People who have already filed a tax return with their losses who then get a grant will have to include that money as income on the 2006 tax return.

“If someone goes ahead and deducts all losses and then gets a grant, they will have taxable income in the next year,” Holcomb said.

Holcomb agrees taxes are more complicated than ever this year. Even people who usually prepare their own, who are very tax savvy, are coming in and asking for help. He said the deadline extension has helped all of his clients because there has been so much paperwork to deal with applying for SBA loans and keeping up with receipts for repair work.

The IRS guidance outlined in Revenue Procedure 2006-32 provides information on several safe harbor methods that individual taxpayers may use in determining their casualty and theft loss deductions under section 165 of the Internal Revenue Code. The safe harbor methods apply to personal-use residential real property and certain personal belongings damaged or destroyed as a result of Hurricanes Katrina, Rita or Wilma.

The Revenue Procedure provides three safe harbor methods that individuals may use to determine the decrease in fair market value of personal-use residential real property. The Revenue Procedure also provides a fourth safe harbor method that individuals may use to determine the fair market value of certain personal belongings immediately before the hurricanes.

According to the IRS, these safe harbor methods provide individuals, who may have lost their records or otherwise are unable to determine proper values, with optional ways to determine the decrease in fair market value of personal use residential real property and the pre-hurricane value of certain personal belongings. However, individuals may use the methods of determining these values described in Publication 547, Casualties, Disasters, and Thefts, rather than a safe harbor method.

To ensure that they receive the relief to which they are entitled, the IRS recommends affected taxpayers mark “Hurricane Katrina” in red ink on the top of their returns.
In addition, affected taxpayers may identify themselves as eligible for relief by calling the IRS Disaster Hotline at 1-866-562-5227.

For more information on IRS tax law changes and relief provisions for business and individuals affected by the hurricanes of 2005, go to www.irs.gov and type Form 4492 in the search box in order to download information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma.

Contact MBJ contributing writer Becky Gillette at bgillette@bellsouth.net.


… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.

If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.

Click for more info

About Becky Gillette

Leave a Reply