There was nothing quite like the recent series of deadly tornadoes that tore through the Southern Plains to remind business owners about how quickly a natural disaster can destroy a business. Fortunately, when such tragedy strikes, there are several types of relief available, including tax breaks that are designed to help offset any losses.

"Taxpayers who live in areas most often affected by adverse weather -- tornadoes, earthquakes, hurricanes -- should be aware that they have a number of important options under the tax law, should disaster strike," says Mark Luscombe, CPA, attorney and principal federal tax analyst for tax and business law publisher CCH Inc.. "They should routinely familiarize themselves with the deductions and keep their records in a safe place to ensure they have what they need for filing if their home or business is damaged."

In general, Luscombe says, the IRS allows certain deductions on an individual's income tax following a "casualty," a loss of property resulting from a sudden, unexpected or unusual event. A taxpayer can deduct the new amount of actual property loss resulting from damage to, or destruction of, property. In the case of non-business property, the deduction is limited to losses arising from fire, storm, shipwreck or other casualty, such as tornadoes, hurricanes, earthquakes and abnormal flooding.

To qualify for a casualty loss deduction, the taxpayer must prove to the IRS that a loss occurred, and that the loss was caused by a casualty. CCH urges victims of disasters to also consider damage to the property that is an indirect result of the casualty (including destruction of doors, windows, plants and shrubbery, etc.) "Valuation of your property is of the utmost importance when determining the amount of loss sustained in the casualty," says Luscombe.

Special rules come into play if losses occur in an area determined by the President of the United States to be a "Disaster Area." In this case, a property owner can deduct his or her losses in the year immediately before the tax year when the disaster occurs. This allows taxpayers who suffered losses early in 1999, for example, to get some quick relief by applying the loss to their 1998 tax bill.

Small business owners can also take advantage of involuntary conversion rules for disaster damage that provide further assistance to business owners whose property was damaged or involuntarily converted in government-declared disasters. "Property used in a business that is damaged by a natural disaster is eligible for 'non-recognition of gain' under the law," says Luscombe. "This means that qualified replacement property can be purchased, and the gain can be deferred, offering tax relief to disaster victims."

He continues: "This provides relief for businesses that are forced to suspend operations for a substantial time due to the property damage. In other words, if a business loses valuable customers during the suspension, and the business fails, the owners may want to consider reinvesting their capital in a new business venture."

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