Tax Implications for Casualties and Theft

February 6, 2018 – Have you suffered any recent property damages or thefts due to recent weather events/bad luck? You may be eligible to deduct the cost of your loss! Keep reading…

IRS Publication 547

The rules for theft and casualty losses vary by case. In order to qualify for a personal casualty/theft loss or business deduction you must be able to prove the following

  • The type of casualty/theft and when it occurred
  • That the loss was a direct result of the casualty/theft
  • That you were the owner of the property
  • Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery

There are two tests that must be met in order to claim a personal casualty/theft loss. The first test to clear is a $100 floor post insurance reimbursement. The 2nd test you must clear post insurance and post the $100 floor, is the loss must be greater than 10% of your adjusted gross income.  Each piece of property must be valued separately and then added together to apply to the two tests.

The above tests do not apply to business deductions which may be deducted in full. If damage/theft has occurred to your business or rental property you may be able to take the cost of damages as a normal business expenditure. For both personal and business casualty/theft losses the amount deducted will be the lower of your basis at the time of the casualty/theft or the difference between the fair market value of the property immediately before the casualty/theft less the fair market value of the property immediately after the casualty/theft.

Unique Situations

The law offers everyone some flexibility as to when you can deduct the loss. For instance for federal disaster areas, you are allowed to take the deduction in the year previous than when the disaster occurred. This may benefit some if you have no tax due in the year of the disaster and are able to shift the deduction into the previous year to obtain an immediate refund of taxes paid. Another issue in some cases, insurance claims take longer than a year to complete and claiming the deduction in one year and receiving proceeds in another year will cause a timing difference.  The law states that you generally must claim a loss in the year of the disaster. But there are instances, where a loss may be claimed in a later year.  There are also other anomalies related to casualty losses that include gains from insurance proceeds, purchasing replacement property, personal & business use assets, section 179 properties, and inventories.

Tax Cuts and Jobs Act

Please note, the above rules apply to the 2017 tax year. For the 2018 tax year, The Tax Cut and Jobs Act rules limit deductibility of casualty/theft losses to presidentially declared disaster areas.

About the Author

Dopkins Tax Advisory Group

Our more than 25 tax professionals include specialists who are proactive, strategic thinkers who work to maximize your cash flow. In addition to cash flow considerations, we also believe that tax planning is most effective when it is integrated with, and fully supports, your business plan and personal goals. Our approach to tax planning will help you better understand the tax implications of any proposed course of action, and together we can make the right decisions for your business. For more information, contact Robert Pollock, CPA at rpollock@dopkins.com.