As a homeowner or small business owner, we try to plan for everything. However, as we have seen in recent months, there is little we can do in the face of historic natural disasters. When the unexpected or unusual happen, taxpayers are entitled to claim deductions for disasters, casualty, and theft that result in certain losses. According to the IRS:
- Theft is defined as “the taking and removal of money or property with the intent to deprive the owner of it.” Further, “[t]he taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.” This may include burglary, robbery, larceny, embezzlement, extortion, or blackmail, among other criminal offenses.
- Casualty includes losses that occur as a “result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption.” Normal wear and tear, damage due to the owner’s own negligence or own malfeasance, and progressive deterioration do not fall into this description.
- Disaster losses are associated with federally declared disaster areas, which the President has designated as eligible for Federal emergency assistance.
The IRS requires that casualty and theft losses be claimed in Schedule A (Form 1040), as well as Form 4684 (Casualties and Theft). Section A of Form 4684 covers personal use property, while Section B of the form is where business and income-producing property loss should be reported.
To calculate your personal use property deduction, you must first determine the cost or adjusted basis of the lost or damaged property. This is generally the cost of the item adjusted by depreciation, appreciation, or improvements. Then, any insurance proceeds or salvage value recovered for the property must be subtracted, as well as a subtraction of $100 per reported property. The deduction is then calculated by taking the sum of these amounts and subtracting 10% of your adjusted gross income reported from your Form 1040.
In contrast, business and income-producing property are property used “in a trade or business or for income-producing purposes”. Except for the $100 subtraction, the calculation for business property follows the same principal as personal property. However, there are important differences in how the IRS requires the losses reported. For example, a separate form must first be completed for each casualty or loss, then the gains and losses must be calculated based on whether you have held the property for one year or more.
The Law Offices of Robert S. Thomas
If you have experienced significant loss of personal or business property due to theft, casualty, or disaster, you should seek legal assistance. The IRS looks skeptically at unusual deductions, and it is important to report your losses accurately. I can help you. I have practiced in IRS taxation for over two decades and have a Master of Law Degree (LLM) in Taxation. I stay apprised with all significant changes in the law and can provide you with accurate, intelligent legal advice. Contact The Law Offices of Robert S. Thomas at 847-392-5893 for an appointment or visit our website today.