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Disaster casualty loss deduction

Disaster casualty loss deduction

A business accident loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, and unusual event, such as a flood, hurricane, tornado, fire, earthquake, or even a volcanic eruption.

If your property is not completely destroyed, or if it is personal-use property, you must determine your casualty loss by first calculating the decrease in the fair market value of your property as a result of the casualty. Keep in mind that the general definition of fair market value is the price at which the property would change hands between a buyer and a seller, without having to buy or sell, and both having a reasonable knowledge of all the necessary facts.

If your business or income-producing property is completely destroyed, the decrease in fair market value is not considered. Unfortunately, your loss is the property’s adjusted basis, less any salvage value and any insurance or other reimbursement you receive or expect to receive (for more information on determining adjusted basis, see Publication 551, Asset Basis). Essentially, you get what you can document you paid for, adjusted for depreciation or additions.

And, much as many businesses would like to, when calculating your loss, don’t consider lost profits or future revenue due to the incident. Casualty losses are claimed on Form 4684, Casualties and Theft. Section A is used for personal use property and Section B is used for business or income-producing property. If personal-use property was destroyed or stolen, you may refer to Publication 584B, Loss from Business Accidents, Disasters, and Theft Workbook.

Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in a Presidentially declared disaster area, you may choose to deduct that loss on your tax return for the year immediately preceding the year of the loss. If you already filed your prior year return, the loss can be claimed in the prior year by filing an amended return (Form 1120X for Corporations).

Generally, you must elect to use the prior year before the current year’s return due date, with no extensions. For example, the election to deduct a 2005 disaster loss on your 2004 return must be made on or before the due date (without extensions) of the 2005 return. You can revoke this election within 90 days of your election. returning to the IRS any refund or credit you received when you made the election. If you revoke your election before receiving a refund, you must return the refund within 30 days of receipt for the revocation to be effective.

Generally, you can choose to defer reporting earnings due to insurance proceeds that exceed your basis on casualty-damaged or destroyed property if you buy replacement property or repair the damage within two years. Gain deferral is only available if the amount you spend to replace or repair your property equals or exceeds the insurance proceeds you receive. Otherwise, the excess of the insurance proceeds over the amount you spend to replace or repair your property must be reported as gain.

If your loss deduction is more than your income, you may have a net operating loss. You don’t have to be in business to have a net operating loss from a casualty. For more information, see Publication 536, Net Operating Loss.

The IRS can postpone certain tax deadlines for taxpayers affected by a Presidentially declared disaster for up to one year. Tax deadlines that the IRS can postpone include those for filing returns of income, assets, gifts, generation-skipping transfers, certain excise and employment taxes, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA.

If the IRS postpones the due date for filing your return and paying your taxes and you are affected by a Presidentially declared disaster area, the IRS may reduce interest on less paid taxes that would otherwise accrue during the deferral period.

In recent updates, tax relief is available for victims of Hurricane Gustav in Louisiana and Mississippi. Certain filing and payment deadlines have been postponed until January 1. January 5, 2009. With an active hurricane season underway, the IRS recommends that taxpayers in vulnerable areas take steps now to protect their tax and financial records. For more information on hurricane recovery, visit the Federal Emergency Management Agency’s Hurricane Response page.

In other areas, recent disaster tax relief has been authorized to:

  • Definition of the Midwest Disaster Area for Purposes of Certain Provisions of the
  • Tax Extension and Alternative Minimum Tax Relief Act of 2008
  • Victims of the wildfires in California
  • Victims of storms and floods in Missouri
  • Victims of Storms and Floods in Puerto Rico
  • Victims of Storms and Floods in Indiana
  • Victims of Hurricane Ike in Texas and Louisiana
  • Relief for victims of Hurricane Gustav in Louisiana
  • Relief for Victims of Tropical Storm Fay in Florida
  • Relief for victims of Hurricane Dolly in Texas
  • Special relief for qualified recovery assistance property located in the Kansas disaster area
  • Special Help for Greensburg, Kansas Tornado Victims

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