Natural disasters happen. Oftentimes, they are sudden with no way to prepare.
After a disaster, business owners are not only faced with property damage but also with business closures, damage to their employees’ properties and other aspects that make it hard for their business to stay afloat.
But what if you could put a plan in place to keep you and your business sailing smoothly?
If you don’t have a plan, are there steps that you can take to ease your recovery?
In this episode of The Wrap, Warren Averett’s own Mindy Rankin, CPA, CCD, and Tammy McGaughy, CPA/ABV, CFF, CFE, join our hosts to discuss how businesses are impacted by natural disasters, how they can recover and what steps can be taken to prepare and prevent future losses.
After listening to this episode, you’ll be able to:
(00:00:00) Commentators: Hey, I’m Paul Perry. I’m Kim Hartsock, and you are listening to The Wrap, A Warren Averett podcast for business leaders, designed to help you access vital business information and trends when you need it, so you can listen, learn and then get on with your day. Now, let’s get down to business.
(00:00:21) Paul Perry: Hi, everyone, and welcome to The Wrap. Today, we are talking with two of our own experts on how you, as a business owner, can not only recover from a natural disaster, but also prepare for one.
Now, obviously, your first focus is checking on your people, making sure everyone is safe and have what they need to take care of themselves and their loved ones. But in this episode, we’re focusing more on the business side of a natural disaster and the approach you can take to both recover and prepare.
(00:00:45) Kim Hartsock: Yes, and while we record this, we are certainly thinking of our friends down in Florida who have been significantly impacted by Hurricane Ian. We have offices down along the coast in Florida, and we were certainly keeping an eye on that. We are grateful to be able to report that all of our teammates made it out of the hurricane without any significant damage.
We felt like it was time to talk again about what we need to do to recover from a natural disaster. But also, for those of us who haven’t experienced one, it doesn’t mean we won’t experience one. So, it’s always a good idea to revisit this and think about what are some lessons learned and what are some things that we can do to make sure that we’re prepared in the event that we do have to face a natural disaster.
(00:01:34) Paul Perry: Good information to be shared. Today we have two of our own that are going to be joining us. We are welcoming back Mindy Rankin, out of our Panama City office, and Tammy McGaughy. Welcome back and glad to have you with us today.
(00:01:49) Mindy Rankin: Hey, Paul. Hey, Kim. My name is Mindy Rankin, and I’m a Tax Member in the Panama City office. I have been with the firm technically since I started out of college. I started with O’Sullivan Creel, and we merged in with Warren Averett. Then I was with Jay & Moody, and we merged in with Warren Averett. I’m a Warren Averett lifer, technically.
(00:02:11) Tammy McGaughy: Hi everyone. My name is Tammy McGaughy. I am an Audit Member in the Fort Walton Beach office. Like Mindy, I’ve been with the firm for a long time. I work on forensic audits, litigation support, value businesses and a lot of consulting-type work. I’m really happy to be here today.
(00:02:31) Kim Hartsock: Mindy, you were on the podcast the last time that we recorded one of these. Unfortunately, you and your teammates down in our Panama City office had some real experience with this topic with Hurricane Michael, which as we know was about four years ago. We’re glad to have you back and look forward to hearing things that you’ve learned through that experience.
(00:02:53) Mindy Rankin: Yeah, Kim, it’s hard to believe. October 10, 2022, will be four years to the day that Hurricane Michael devastated us in Panama City. It’s crazy, but we are actually still working on rebuilds. We still have some clients that are in litigation over insurance claims. So, it’s really been a very eye-opening experience, and I’m so glad that we’re on the other side.
(00:03:18) Paul Perry: Glad to have both of y’all on the podcast, but at the firm as well. So, let’s talk about some of the first steps businesses should be taking. Let’s define, what is a casualty loss?
(00:03:27) Mindy Rankin: A casualty loss is damage, destruction or loss of property resulting from an event that is sudden, unexpected or unusual. In 2018, you could only take a casualty loss if it was in a Presidential Declared Disaster Area. So, it’s really important when you’ve experienced some kind of event like this, that you get the Presidential Declared Disaster Area. Most major hurricanes and even small hurricanes get this special designation.
So, the first thing is, if you’re not in a Presidential Declared Disaster Area from 2018 to 2025, then you can’t take a casualty loss. So that’s a little bit of a change in the tax law. But really it just has to be a sudden, unexpected event. It can’t be something that’s like built up over time.
Any kind of hurricane, natural disaster, wildfire or any of those activities would put you in a position to possibly claim a casualty loss on your tax return.
(00:04:30) Kim Hartsock: Now, is there any benefit, Mindy, to say you’re in the fringe area? Obviously, there’s direct impact places that would get that presidential declaration pretty immediately.
If you’re in the fringe area and you feel like you should have gotten that presidential declaration, but you haven’t, what should you do? Should you just sit at home and take that? Is there any benefit to writing a letter or making a phone call? What should you do?
(00:04:54) Mindy Rankin: Yeah, so not only do you need the Presidential Declared Disaster Area, but there’s also a special kind of loss that’s called a qualified disaster, and those provide you even bigger benefits.
If you’ll think back to Hurricane Harvey, Irma, some of the California wildfires and even Hurricane Michael, getting the qualified disaster designation…that is huge, because when you get that qualified disaster designation, it opens up employee retention credits for you. There’s a limit on normal casualty losses, that’s 10% of your adjusted gross income. The qualified disaster loss actually removes that limitation, so you don’t have to worry about putting subject to 10% of your income. So, you can just claim it. Then, it also lets you just add it to your standard deduction.
So, if you’re somebody that has a pretty simple tax return, and you just claim the standard deduction every year, you can actually add your casualty loss to the standard deduction.
It’s really a huge benefit to get that designated as a qualified disaster, and you have to wait for Congress to do that. Basically after Hurricane Michael hit, it took them quite a while to give us that designation. So, I would highly recommend that you go ahead and start contacting your local congressman now to rally for that special designation.
Usually, it’s done in December when they’re at the end of the year, and they’re working on the tax laws. They like to pass tax laws in in December. So, a lot of the negotiations and stuff happens in December. Start now. Reach out to your local congressman, state senators and everybody that you can, to try to get that designation.
(00:06:34) Paul Perry: So, Mindy, what kind of things are included in a casualty loss?
(00:06:38) Mindy Rankin: You have to be the owner of the property. You actually have to have some damage, so you have to be out of pocket. The first thing that you would do is: if you’re a homeowner or if you own a building or a business, you would want to contact your insurance company immediately and go ahead and file a claim.
What they do is, they’ll send out an adjuster and the adjuster will examine your property for damage and then make an initial payment to you. A lot of times, it’s really confusing because you get this really thick document that says, “Here’s all your losses.” Then, they take out recoverable depreciation; they take out nonrecoverable depreciation; they take out your deductible.
You end up with a net check, but you really have damage. What happens then is you have to get a contractor or someone to actually do the work. A lot of times, it ends up being more than what the insurance company initially provides you. So, then you would want to start negotiations between your contractor and your insurance company.
There are public adjusters available to people. You know, we had several clients that definitely hired a public adjuster. Now the problem with that is, is they get 10% off the top. If you can do it yourself, it’s always a good idea. But some people just don’t have time or energy to negotiate between the contractor and the insurance company.
I really, really think that the important part is making sure that you know your coverages. There’s coverage A; there’s coverage B; there’s all these different coverages. You have limits on them. Personal property has a limit. The structure itself has a limit. You know, your fences and stuff like that has a limit.
You really have to be familiar with what your insurance company is supposed to cover versus what you actually have damage for.
(00:08:24) Kim Hartsock: Now, Tammy, I know that in addition to the physical property loss and claiming for that, there’s also a loss to your business being closed, right? If there’s damage to your business, and you can’t open. If there’s damage to your employees’ homes, or there’s damage to the road, and no one can get there. No one can come visit.
You know where these places are (where the hurricanes come) are very big tourist destinations, right? If nobody can get there, and there’s no hotels for them to stay in, then there’s a loss of business. Talk to me about that. How does that process work?
(00:09:00) Tammy McGaughy: Absolutely, Kim. You’re absolutely right. People don’t realize that they can get covered for this type of loss. But essentially, it’s called a business interruption loss. What that means is a business is not able to have normal operations.
They’re not able to have sales. They’re not able to pay their employees. They actually lose money during the disaster that has occurred. They’re down for a period of time, but if you have business interruption coverage in your insurance, then it will help replace that lost income during the period that you are shut down.
A lot of people may not know that they have this in their policy, but it will be helpful to recover if you have that coverage.
(00:09:47) Paul Perry: How do you know if you’re covered or not? Are there some tips or quick things that we can let our listeners know that they need to be focusing on?
(00:09:53) Tammy McGaughy: Yeah, absolutely. First, you just want to make sure you review your insurance policy. You know, there is a provision that will say business interruption. There could be some extra expense provisions.
If you are incurring extra expenses during this to try and clean up debris or something like that, there’s provision in your policy for that debris removal. So, your policy is a good indicator of what is actually covered. That’s one thing. Policies are really big and sometimes are difficult to understand.
So, you might want to check with your insurance agent. They should be able to identify exactly what’s covered under part of the comprehensive package, whether it’s physical or a business interruption. Then sometimes, the last thing that people don’t realize is that insurance can penalize you if you are underinsured.
You may have a business interruption provision in your policy, but if you’re underinsured, they’re going to penalize you. If you’re overinsured, they’re going to penalize you. So, there is a co-insurance provision. The insurance agent should be able to guide you as to what you know and what coverage you have.
Sometimes, people want to lessen their premiums throughout the period of time, without really realizing the effect that that could have when you experience a disaster. You know, from that type of event.
(00:11:33) Mindy Rankin: Tammy, just to piggyback on that, we had several clients during Hurricane Michael that thought that they had wind coverage. It turns out that they had a lot of buildings in downtown Panama City, and it just turned out that they did not at all have wind coverage. So, they were devastated. I mean, there was so much damage. They were just under the impression all along and through all these years that they had the coverage and when they confronted the insurance company, they told them that several years back they’d dropped the wind coverage.
You have to be very careful when you’re reviewing those packets. I know that they come, and they’re huge packets that are hard to read, but you really just need to get an expert in to review that for you.
(00:12:18) Kim Hartsock: Yeah, it seems like that’s one of those things that we should do every year is just have someone review our policy.
Ask us if any situations have changed and make sure they understand what we need and that we’re covered with not only the right policy but at the right amounts. As Tammy mentioned, we could get penalized if we’re under or over. You wouldn’t expect things to stay the same year after year. So, if you haven’t done that in several years…now is probably a good time to meet with someone and have them review your policy.
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(00:13:02) Mindy Rankin: If you’re listening to this, and you’ve just been through a hurricane, I just want to tell you that it is going to be a difficult process, like you will be passed on to so many adjusters.
Just for my personal claim, there were probably at least six or seven people that I talked to over time. You have to retell your story over and over again. You just have to stay on top of making sure that you’re getting reimbursed for what your coverage is. Tammy has a good story about a business interruption claim. One of our clients, the insurance company sent the estimate to them where they did the calculations and said, “Here’s what we think that you should be given.” It was a dentist. When Tammy reviewed the claim, it was out of whack. Tammy, do you want to tell that story?
(00:13:48) Tammy McGaughy: Well, yes. It was the insurance adjustor or the insurance company when they were evaluating production. So, one of the things that we look at is: when we’re trying to calculate what the business interruption is, we’re looking at what’s called a “But For” analysis.
They’re looking at what does the period look like before the storm, versus what does the period look like after the storm? In this specific case, their production was impacted by one of the dentists that was on maternity leave, and so they were making it seem like the production loss was a lot less than what it really was.
Once we pointed that out to them, they were able to claim more in the business interruption piece because of the correction of that production. So, it’s really important to understand the financial information that they’re looking for and to really analyze what they’re looking at.
(00:14:48) Because it is a “But For” analysis, we’re always looking at what position were you in prior to the disaster, and then compare that to the position you ended up in. So, the delta between that is really the business interruption piece that you get reimbursed for.
You know, if you are trying to figure out what information that you need for a business interruption calculation, I’ll just highlight some of those things. Financial information obviously is really, really important. Some reports that we looked at as we’re reviewing and/or calculating some business interruption claims are looking at production reports, monthly profit and loss reports, or it could be wage reports.
Depending on your policy and the length that you were down, you may need to look at that from a daily perspective. It could be a monthly perspective or even an annual perspective. So, the financial information is really important. As you’re going through anything that you can identify as far as extra expenses that you have above and beyond your normal operations, you may be covered under provision.
Making sure that you identify those expenses is good as well. One last thing is the insurance company will want to make sure that you identify any mitigating activities that you’re doing to try and minimize the loss. They will take that into consideration when you’re determining your loss if you have any mitigation.
Say you have some revenues that you normally wouldn’t have had to try and help mitigate that loss. That will go into consideration on the over amount that you’ll end up getting from your insurance claim.
If you think about a “But for”, what were you doing before? How were you doing operationally? What was your net income? What did that look like before the storm or disaster? What does that look like now? That’s pretty much what your business interruption piece would look like.
(00:17:02) Kim Hartsock: This is all really helpful to know. I think, you know, Mindy, you’ve dealt with so many business owners going through this with Hurricane Michael, and what should I know now as it relates to casualty loss.
Are there any words of advice that you would give me? Is there anything that you would say, if I’m right in the thick of this, dealing with it? Or if I’m somebody that’s saying that I’m really grateful that I dodged a bullet, and I don’t have to deal with this, but it’s something that I need to know in the future. What would you say to the business owner that’s listening?
(00:17:34) Mindy Rankin: Yeah, I mean, we talked a lot about insurance, but just another thing is disaster recovery preparation. So, if you have computer systems, and your files are out there, and your building is damaged, and your servers are flooded, that’s one of the things that some of our clients were not prepared for.
One of the things that’s important is, and something that you don’t think about: Did I take a backup home? You know, when I left, when I’m preparing for a hurricane, did I make a backup and just take it home with me, put it in my pocket? You know, anything that you can do to make sure that if you get to your office, and it’s completely wrecked, you have got to be able to get back into your computer systems and get them back up pretty quickly.
There are actually insurance policies that help with that from a technology standpoint. We did have a client that had gone through all of those trainings and had done disaster backup plans. The one thing that got them was that that nobody thought about the location of their backups. It was expected to be run on a generator.
The generator actually required natural gas, and it was hooked up to the city’s natural gas line. Well, the city shut down the natural gas. So, they had no access for days to their data, and it was a pretty big place that really needed access to that data. That was just one small hiccup. I mean, they had done tons of planning, and you know, it’s just one thing you don’t think about.
(00:19:06) Paul Perry: That’s some good information, Mindy. What I really say to folks a lot in that space, when we talk to them, is you need a backup of the backup of the backup, right? You need to have two or three things that you’re prepared for. You talked about planning. I think that a lot of companies will put together a disaster recovery plan, and they’ll say, “This is how we’re going to do it.”
(00:19:27) But if you test that…if you don’t even do a tabletop exercise. Let’s sit around a table for three hours, let’s talk about and think of every possible issue that may come up, and let’s walk through it. Get everybody at the table. There may be people thinking about things that others aren’t.
You want to know, “Hey, what happens if natural gas is cut off? How would we handle that?” That may come up during that discussion that would’ve been documented somewhere. But yeah, definitely something important there.
Mindy, Tammy, this has been really good information for the folks listening to this. You know, here on The Wrap, we like to wrap it up in 60 seconds. What is it you want to leave the listeners with? Tammy, we’ll start with you.
(00:20:16) Tammy McGaughy: Oh, sure Paul. Thank you. If you’re unsure what to do, and you want to have someone calculate a business interruption claim, go reach out to an advisor. You know, someone can either help prepare a claim for you or even review a claim. As we mentioned before in reviewing a claim, you have a fresh set of eyes, and there may be something that somebody hasn’t considered.
Just reach out to an advisor. I know Warren Averett has done that type of work in the past, but just reach out to your advisor and try to get some input from them.
(00:20:49) Mindy Rankin: I think that the biggest thing from a tax perspective is documentation. There’s going to be a lot of work that is going to go into rebuilding property, rebuilding your house and stuff like that. There are a lot of people that show up in a disaster area that want to be paid in cash, and they don’t have proper documentation. I can assure you that when it’s time to claim your casualty loss or even to submit to your insurance company, you definitely are going to need documentation.
Even if you use someone that wants to be paid in cash, or they’re just random people that are helping you clean up, just get something from them like their business card or some kind of documentation so that you have proof. Because, you know, to be able to claim the loss on your tax return and get money back, you definitely have to have the actual repairs, receipts and everything to get reimbursed from your insurance company.
(00:21:45) Kim Hartsock: Just a couple of things before we wrap up… Mindy, I know that the IRS did just give an extension. Could you tell our listeners where to go to see if there are any extensions on any reporting that they need to do, or where should they check to make sure that they know the latest and greatest of filing deadlines and things like that?
(00:22:05) Mindy Rankin: Yeah, the IRS just recently released that all residents of Florida qualify for Hurricane Ian Tax Relief. I believe, yesterday they actually added North Carolina and South Carolina. So, basically if you had a tax deadline in Florida between September 23 and February 15, 2023, you are extended until February 15, 2023.
Any filing deadlines that were going to be due on October 17, all of that was postponed. You do have some time to gather your paperwork and get all that stuff together before you need to file.
(00:22:50) Kim Hartsock: They can always just check irs.gov for any latest announcements there and also our website. We typically post all of those things there as well, which is warrenaverett.com. So, Mindy and Tammy, thank you so much for being with us today. I know that you both are very busy right now, and we appreciate you taking time to talk to our listeners.
(00:23:11) Mindy Rankin and Tammy McGaughy: It’s great to talk with you again. We hope to see you soon. Thanks.
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