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Michael Redemske
Michael Redemske

Are You Still Reeling From Irene?

Best practice tips on recovering from disasters and how to develop a disaster recovery plan.

September 15, 2011
by Michael Redemske, CPA

On September 1, 2011, the Internal Revenue Service (IRS) issued an announcement granting tax preparers who were affected by Hurricane Irene until September 22 to file returns that would normally have been due September 15. This relief primarily affects corporations, partnerships and trusts that previously obtained a tax filing extension.

Tax preparers must be located in an area that was under an evacuation order or a severe weather warning because of Hurricane Irene. Relief is available even if you are located outside of the federally declared disaster areas. This relief is available regardless of the location of the affected taxpayer. This relief does not apply to any tax-payment requirements.

The IRS has also announced that certain taxpayers in North Carolina, New Jersey, New York, Vermont and Puerto Rico will receive relief, and other locations are expected to be added in coming days, following additional damage assessments by the Federal Emergency Management Agency (FEMA). This relief postpones certain tax filing and payment deadlines to October 31, 2011. It includes corporations and businesses that previously obtained an extension until Sep. 15, 2011, to file their 2010 returns and individuals and businesses that received a similar extension until October 17. It also includes the estimated tax payment for the third quarter of 2011, which would normally be due September 15.

Full details, including the start date for the relief in various locations and information on how to claim a disaster loss by amending a prior-year tax return, can be found in tax relief announcements for individual states on the IRS website.

Thousands of businesses and other organizations felt the impact of Hurricane Irene. Because this catastrophe struck some of the more populated areas of the United States (U.S.), the effects were felt by millions and the news coverage was widespread. Hurricane Irene should represent a wake-up call for all business owners and managers that disasters strike everywhere, and sometimes strike with little or no warning.

How quickly your company can get back to business after a fire, a tornado or a flood often depends on the emergency planning you do in advance. Your ability to recover from a disaster is directly proportional to the amount of planning you do before disaster strikes.

When you were in school, administrators conducted fire drills so that everyone knew where to go in the event of an emergency. A business setting is no different. You have to plan for the unexpected — even the unthinkable — so that everyone knows how to react to protect lives, minimize damage and get back to business as quickly as possible.

Think about the oil spill in the Gulf of Mexico. The adverse effects of that disaster were not confined to the owner of the leaking well. BP’s business partners, subcontractors, suppliers and customers, not to mention BP’s employees and shareholders were all adversely affected by that unfortunate chain of events. Local fishermen, shrimpers, oystermen, restaurants, hotels and businesses far from the Gulf Coast struggled to survive the economic shockwaves.

Though each situation is unique, any organization can be better prepared if it plans carefully, puts emergency procedures in place and practices for contingencies of all kinds.

According to government statistics, small businesses account for more than 99 percent of all companies with employees, employ 50 percent of all private-sector workers and provide nearly 45 percent of the nation's payroll. A commitment to planning today protects your business investment and gives your company a better chance for survival. If your business survives a disaster, your employees keep their jobs and your customers keep their supply lines intact.

The effects of the failure of even one business can reverberate through the local economy and devastate a community. According to R. David Paulison, former executive director of FEMA, roughly 40 percent to 60 percent of small businesses never reopen their doors following a disaster.

Let’s face it: Natural and man-made disasters are a constant threat. How long can your business operate without electricity, without the Internet, without a key supplier, with roads closed by a flood or earthquake, with oil closing local beaches or the Gulf fishing areas? Yet many business owners think that the threat is elsewhere, that disaster cannot possibly happen in their own backyard.

Developing a Disaster Plan

Here are four steps you can take to develop a disaster recovery plan for your business:

  1. Meet with an insurance agent who understands your business. Are your key business assets covered for their full replacement cost? Do you have business interruption insurance to replace income lost during a covered shutdown? Normal hazard insurance often does not cover floods or earthquakes, so make sure you have the right kind of insurance. Most important: Make sure you know what your insurance does not cover.

    Are you prepared to relocate the business temporarily? Do you have an alternate sourcing plan if your key suppliers shut down?

  2. Make sure your employees know what to do in case of an emergency. Do all employees know where emergency exits are located? Have you appointed someone who is responsible for making sure all the fire extinguishers work? Do you have an evacuation plan? Do you practice safety drills regularly?
  3. Keep copies of important business records offsite. Are copies of all vital business records saved on both the hard drive and on backup discs at an offsite location at least 50 miles away from the main business site? Many key business records are irreplaceable, or would be difficult or expensive to recreate. Carefully consider what is critical to your business, like designs, formulas, contracts, etc.

    Current accounting records are obviously important, but historical accounting information may also be needed. Historical tax information, including copies of prior tax returns and key elections may be difficult to recover or reproduce.

  4. Establish a “recovery communications” plan. Designate key employees with the responsibility to contact suppliers, creditors, other employees, customers, the media, etc. to spread the word that the business is still functional.

Conclusion

In the aftermath of a natural disaster, the government will provide some help, including recovery assistance and federal tax relief to help you in getting back to business. But as so many small businesses have experienced recently, it takes time — sometimes many months or years — for government programs to become fully operational after a major disaster. By that time, it is often too late for some businesses to recover.

If your company is going to remain open and even thrive in the wake of a major catastrophe, it will help if you have a plan in place before disaster strikes. Make sure that you plan for the worst, and hope you never have to activate the plan.


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Michael R. Redemske, CPA, is an instructor in residence at the University of Connecticut where he teaches federal income taxes and personal financial planning.