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Hurricane Katrina – How To Use Your Business Loss To Get A Refund on 2004 Taxes

By Richard A. Chapo

With the massive losses caused by Katrina, the economy of theGulf Coast region is in extremely bad shape. Fortunately, thereis a quirk in the tax code that can help you generate a largerefund from your 2004 taxes.

Apply Losses to 2004 Taxes

When a large geographic area suffers a disaster, the Presidentcan declare it a federal disaster area. President Bush has madesuch a declaration for the Gulf Coast area.

While you’ve probably heard such declarations occur over theyears, I doubt it means much to you. The declaration, however,has major implications for recovery efforts. Initially, thedeclaration of a federal disaster area means the federalgovernment is going to provide disaster relief loans, specialgrants that don’t have to be repaid, unemployment benefits and avariety of other assistance. It also signifies a major tax breakfor impacted businesses.

When a business suffers a loss, the deduction must typically bemade in the year the loss occurred. With Hurricane Katrina, thededuction would typically occur when you file taxes in 2006. Theproblem, of course, is 2006 is a very long time from now if yourbusiness is destroyed. You will find this hard to believe, butthe IRS is here to help.

The IRS is going to give you cash. Under current tax law, youmay make a special election to deduct your business lossescaused by Katrina on your 2004 taxes. By doing this, you do nothave to wait till 2006 to get a tax refund. You don’t have to dothis, but it may be the key to getting necessary cash.

To make the special election, you must claim it on your 2004taxes. If you have already filed taxes for 2004, you can file anamended tax return claiming the deduction.

In Closing

Using this tax strategy can help generate badly needed cash.Make sure you pursue the strategy with the help of your taxprofessional. If all your records are destroyed, you can ordercopies of past tax returns from the IRS.

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