When Business Interruptions Happen: Tax Deductions and Credits After a Major Telecom Outage

When a telecom outage wipes your sales or stalls your operations: what to do — and how to get the right tax outcome

Hook: You rely on constant connectivity. When a major Verizon outage in late 2025 and early 2026 interrupted payments, phones and cloud access for thousands of small businesses, many owners were left asking: can I deduct my losses? Will insurance help? Do customer credits from the carrier change my taxable income? This guide gives clear, actionable tax steps for small businesses hit by major telecom outages — including casualty rules, how insurance proceeds are treated, and documentation checklists to survive audits.

The 2025–2026 Verizon outages and why they matter for small business taxes

Late 2025 and early 2026 saw high‑profile Verizon service disruptions that affected voice, text, data and broadband service in multiple regions. Verizon and other telecoms responded with customer credits (some small lump sums like advertised $20 credits), and regulators weighed remedies as merger approvals and oversight continued into 2026. For small businesses that depend on payment terminals, online storefronts, appointment systems, or cloud services, outages translate into two major tax problems:

• Immediate cash loss and extra out‑of‑pocket expenses (mobile hotspots, phone rentals, expedited shipments, temporary staff).
• Claims and recoveries (provider credits, business interruption insurance) that complicate your tax return — timing and character of those receipts matter.

Below: a practical, IRS‑facing playbook to maximize legal tax relief while avoiding common audit traps.

Key concepts at a glance (so you can act fast)

• Ordinary deductible expenses: Extra costs to keep operating during the outage (portable power, overtime) are generally deductible as business expenses.
• Business interruption (BI) insurance: Proceeds that replace lost profits are typically taxable as ordinary income; proceed timing depends on whether you use cash or accrual accounting.
• Casualty loss: Physical damage or spoiled inventory from the outage may qualify under IRC §165, but outages themselves rarely count unless they cause a sudden, identifiable physical loss.
• Provider credits: Customer service credits usually reduce your expense basis or are treated as miscellaneous income depending on accounting method and whether the expense was previously deducted.

Insurance proceeds: what’s usually taxable — and when

Business interruption insurance is a common response to lost profits from service downtime. Understanding the tax result is crucial before you book recovery receipts.

How BI insurance is treated for tax purposes

Generally:

• Lost profits reimbursements — treated as taxable business income. If your policy pays you for net profit that you would have earned, the IRS typically treats that payment as replacement income.
• Reimbursements for deductible expenses — if the insurer reimburses expenses you previously deducted, you must either include the reimbursement in income or reduce the deduction; timing depends on your accounting method.
• Proceeds for physical loss or property repair — if the insurer pays to repair or replace damaged business property, the payment affects the property's tax basis and may be a gain or capital recovery.

Practical example: You operate a salon on a cash basis. A three‑day outage forces 40 appointment cancellations and you buy mobile hotspots so clients can be rebooked via online scheduling. Your BI policy pays you for lost appointment revenue. That BI payment is taxable income for the period it compensates — you do not get an extra tax‑free windfall.

Accounting method matters

• Cash basis taxpayers: recognize insurance receipts when received. If you get a BI check in the same tax year you lost income, it increases your taxable receipts that year.
• Accrual basis taxpayers: may recognize income when all events have occurred that fix the insurer’s liability; consult your CPA for timing rules.

Casualty loss rules: when an outage creates a deductible casualty

Not every loss from an outage qualifies as a casualty. The IRS allows deductions under IRC §165 for losses that are "sudden, unexpected, or unusual" (see IRS Publication 547). A service interruption by itself — without physical damage — often does not meet that test. But there are common, audit‑worthy exceptions that matter for small businesses.

When an outage can create a casualty loss

• Inventory spoilage: Perishable goods that rot because inventory management and refrigeration controls failed during a telecom/VPN outage may be a casualty.
• Damage to equipment: If the outage triggers UPS/backup failures that physically damage servers, point‑of‑sale hardware or refrigeration units, that damage can be a casualty loss.
• Third‑party disruptions that cause sudden physical loss: e.g., a power/telecom outage causing safety systems to malfunction and literally destroy business property.

How to claim a business casualty loss

1. Document the event: time stamps, outage notices from the carrier (official tweets, outage maps), photos of spoiled goods or damaged equipment, repair estimates.
2. Assess the loss amount: fair market value before vs after the casualty, cost to repair, or insurance proceeds received.
3. Complete the tax forms: for business casualties start with Form 4684 (Section B – Business or Income‑Producing Property); the ordinary practice is to carry the result to Form 4797 for trade or business property and the corresponding line on your business return (Schedule C, Form 1120/1120‑S, Form 1065 as applicable).
4. Consider timing and elections: if part of the loss is reimbursed later, you may need to adjust the deduction or include the reimbursement in income. Keep records for possible amendment of prior returns if reimbursements arrive after filing.

Key caveat: an outage that merely causes lost sales but no physical harm or spoilage generally produces lost profit that is not a casualty under §165 — those lost profits are instead handled through BI insurance or other revenue recovery paths.

Deductible expenses you should (and shouldn’t) count

During an outage, many incremental costs are ordinary, necessary and therefore deductible. Keep tight records.

Common deductible items

• Temporary communications (hotspots, cellular backup service, satellite rentals).
• Contractor fees to get systems back online (IT emergency services, expedited cloud failover costs).
• Return shipping or expedited fulfillment fees to meet customer commitments after delays.
• Advertising/notifications to customers about service restoration or refunds (PR and customer communications).
• Employee overtime or temporary staff hired because of the outage.

Costs that are not deductible as casualty losses

• Ordinary lost sales or profits (these are not casualty deductions unless insurance or other recovery addresses them).
• Personal losses (separate personal devices or family phone bills are not deductible on the business return).

How provider credits affect your tax return

When Verizon or any carrier issues a customer credit, do not ignore it — it changes how you report expenses.

• If you previously deducted the telecom expense: a future credit commonly reduces the business expense. If the credit arrives in the same year as the deduction, simply record the net expense. If the credit arrives after you filed the return claiming the original deduction, consult your accountant about whether to report the credit as income or amend the return.
• Small lump‑sum customer rebates: are usually accounted for as reductions to the expense or as other income, depending on accounting policy. Consistency matters — apply the same treatment across years.

Step‑by‑step documentation & tax checklist (do this within 30 days)

1. Capture proof of outage: screenshots of carrier outage pages, tweets, emails from the provider, and timestamps showing scope and duration.
2. Record revenue impact: sales records, POS logs and bank deposits for the outage period vs prior comparable periods (same day of week, last month). Quantify lost sales and justify your method.
3. Save receipts: all emergency purchases tied to operating during the outage — hotspots, couriers, contractor invoices.
4. File and track claims: with the carrier for credits and with your insurer for BI or property claims. Keep claim numbers, rep names and timelines.
5. Get repair estimates and appraisals: for any physical property damage or inventory spoilage — insurers and the IRS will want proof.
6. Talk to your CPA early: discuss accounting method impacts, expected taxable insurance receipts and whether an amended return will be necessary if recoveries arrive later.

Key caveat: an outage that merely causes lost sales but no physical harm or spoilage generally produces lost profit that is not a casualty under §165 — those lost profits are instead handled through BI insurance or other revenue recovery paths.

Business interruption insurance: what many policies miss (and what to ask your broker)

Two practical traps show up repeatedly after telecom outages:

• Policy triggers: many BI policies require direct physical loss or damage to your property to trigger coverage. A pure telecom outage with no physical property damage may not be covered unless you purchased specific contingent business interruption (CBI) or cyber‑related coverage.
• Contingent coverage gaps: some policies exclude losses caused by failure of public utilities or suppliers unless explicitly included. If you rely on cloud providers or carrier systems, ask whether your coverage names those third parties as covered dependencies.

Action items for insurance discussions:

• Request policy wording that shows BI triggers and exclusions.
• Ask about contingent BI or service provider endorsements if your business is highly networked.
• Document internal procedures and business continuity plans — carriers and insurers review mitigation efforts when handling claims.

Advanced tax strategies and 2026 trends to consider

As businesses and regulators adapt to higher outage risk, several tax and financial planning levers became more relevant by 2026.

1. Invest in resilience and deduct the cost now

Purchases that increase redundancy — backup routers, secondary internet circuits, portable power, and additional POS terminals — are typically deductible under Section 179 (expensing) or regular depreciation (bonus depreciation where applicable). For many small businesses, immediate expensing reduces taxable income and increases cash flow. Evaluate expensing vs depreciating with your CPA to optimize multi‑year tax impact.

2. Consider tax credits and state programs

While there is no specific federal “telecom outage” tax credit, several 2024–2026 policy trends mean state and local resilience grants, utility commission refunds, or industry‑specific credits may be available. Check state small business offices or economic development agencies for emergency resilience grants created after high‑profile outages. Also explore any federal cybersecurity or operational resilience credits that have continued to appear in state incentive packages since 2024.

3. Review your accounting method

Changing between cash and accrual can affect when insurance proceeds are recognized. If outages are recurring and insurance recoveries matter to taxable income timing, discuss method elections with your tax advisor (these have IRS procedural requirements).

Two short case studies — what works in practice

Case study 1: The neighborhood bakery

Situation: A bakery’s POS system and credit card processing went offline for 36 hours during a Verizon outage. 200 preorders were canceled and refrigerated cakes were at risk.

Actions taken:

• Documented the outage with carrier outage map screenshots and timestamps.
• Moved critical items to a generator‑backed refrigeration truck (rental invoices kept).
• Filed a claim with the bakery’s BI insurer (which covered lost sales) and requested supplier credit from the carrier.
• Counted spoiled cake ingredients as a casualty loss (photographs, inventory records, repair estimates) and used Form 4684/Form 4797 process with the CPA.

Tax outcome: Deducted rental and mitigation expenses in the year incurred; the BI insurance payout was taxable income that offset the gross receipts hit; the spoilage deduction reduced taxable income subject to proper documentation.

Case study 2: The ecommerce retailer

Situation: An online retailer lost 48 hours of traffic because a major mobile carrier outage cut off a key percentage of its customers in a regional market.

Actions taken:

• Filed a claim with the carrier for customer credits and documented traffic loss with analytics reports and bank deposits.
• No physical property was damaged, so no casualty deduction was taken.
• Filed for BI insurance but discovered the policy required physical damage; insurer denied the lost profit claim.
• Tracked all mitigation expenses (extra advertising to recapture customers) and deducted them as ordinary business expenses.

Tax outcome: No casualty deduction; mitigation costs lowered taxable income. The denied BI claim served as an incentive to revisit insurance coverage for contingent BI moving forward.

Common mistakes that trigger audits (and how to avoid them)

• Failing to document the outage from the carrier — keeps you vulnerable when insurers or the IRS ask for proof.
• Claiming lost profits as a casualty loss without physical damage or spoilage evidence.
• Mishandling insurance proceeds — not reporting taxable BI receipts or failing to adjust deductions when reimbursements arrive later.
• Ignoring state tax implications — some states follow federal treatment; others differ on casualty timing and BI inclusion.

What to bring to your CPA: a practical intake list

• Outage documentation (screenshots, emails, carrier tweets).
• Sales and deposit reports for the outage period and comparable periods.
• Receipts for mitigation and emergency purchases.
• Insurance policy copies and claim correspondence.
• Estimates or invoices for property repair or inventory spoilage.
• Any customer credits or refunds from the carrier with amounts and dates.

Final notes on 2026 trends: resilience is now fiscal planning

The post‑2024 policy environment plus high‑profile outages through 2025 and into 2026 have pushed regulators and carriers toward greater accountability — and more frequent customer credits. At the same time, small businesses increasingly treat connectivity as a critical infrastructure investment. Tax planning that incorporates redundancy, proper insurance coverage (including contingent BI), and robust documentation is now part of routine financial management.

"Your whole life is on the phone" — as public discourse over telecom accountability grew, so did the recognition that small businesses must prepare tax and insurance strategies for outages.

Actionable takeaways — what to do this week if you were affected

1. Collect carrier outage evidence now — screenshots, outbound notices, and any official statements.
2. Save all receipts for emergency expenses and mitigation costs.
3. File claims with your insurer and the carrier promptly and track correspondence.
4. Talk to your CPA about accounting method impacts and how to treat insurance proceeds on your return.
5. Review your BI policy for contingent BI and consider resilience investments eligible for Section 179 expensing.

Need help turning outage pain into a clean tax outcome?

If your small business was hit by a recent Verizon outage (or any major service disruption), start by assembling the evidence and calling your tax advisor. For a fast intake: download our 1‑page outage tax checklist, bring the items in the "What to bring to your CPA" list above, and ask these two questions of your CPA: "What is the likely tax character of any insurance proceeds?" and "Do I have a defensible casualty loss for spoiled or damaged property?"

Call to action: Want the one‑page Outage Tax Checklist and sample claim letter to your carrier? Visit incometaxes.info/resources to download templates and a short video walkthrough for documenting damages and filing claims. If you’d rather skip the paperwork, book a consultation with a small business tax specialist to review your losses and insurance treatment within 72 hours.

Major outages will keep happening. With the right documentation, insurance review and tax strategy, you can limit the pain and protect your business’ cash flow and tax position in 2026 and beyond.

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