A casualty loss can result from the
damage, destruction or loss of your
property from any sudden, unexpected and/or unusual event such as a
flood, hurricane, tornado, fire or earthquake. However, the key words here are
“sudden,” “unexpected” and “unusual.”
Therefore, termite damage to your home
is not considered a casualty loss, since it’s
not sudden. But, damage to your car as a
result of termite damage to your garage
may be considered a casualty loss.
The IRS allows tax deductions for casualty losses sustained during the taxable
year that are not compensated for by
insurance or other means. These deductions are limited to the amount the casualty losses exceed the casualty gains,
plus 10 percent of the adjusted gross
income of the individual or business
within the taxable year. Also, individual
taxpayers are only allowed to include
losses to the extent they exceed $100 for
each casualty. The deduction is limited to
those losses sustained during the taxable
year and not compensated by insurance,
or otherwise.
Understanding and filing casualty losses is no simple task. It can be an arduous
and time-consuming process, and if it’s
not done right, you and your business
could face a multitude of headaches and
lost money.
“It’s always best to consult your CPA on
how to identify a casualty loss for tax
purposes since each incident should be
analyzed separately,” says Rene Lozano,
CPA, a manager in the Tax Department at
Briggs & Veselka, Co.
Smart Business spoke with Lozano
about casualty losses, how to identify
them and how to file taxes for them.
How have recent natural disasters affected
casualty losses?
Hurricane Ike is a good example of a
natural disaster that caused a lot of casualty losses. Besides ravaging Galveston
with floodwaters, Ike sent strong winds
and storms through Houston, destroying
homes and businesses while leaving
many without power for days and even
weeks. Damage estimates from Ike are
expected to exceed $27 billion, making it
the third costliest U.S. hurricane of all
time, behind Andrew in 1992 and Katrina
in 2005.
The IRS often gives taxpayers located
in presidentially declared disaster areas,
such as Harris County, various concessions. The IRS gave individuals, partnerships and corporations time extensions
to file their federal returns. They now
have until Jan. 5, 2009, if they were located in a presidentially declared disaster
area for Hurricane Ike. The IRS is also
allowing taxpayers to take 2008 casualty
losses for Hurricane Ike on their 2007
return. These are a few of the many concessions that the IRS has made.
How do you measure a casualty loss?
Individual taxpayers calculate their
casualty losses on Form 4684, ‘Casualties
and Thefts.’ A casualty loss calculation
starts with the actual cost of the property and fair market value of the property
before and after the casualty loss. The
loss is the reduction of fair market value
from the lesser of cost minus fair market
value after the casualty, or the fair market value before the casualty less the fair
market value after the casualty. The taxpayer will also have to subtract any
insurance processes he or she received
from the loss calculated. The loss is then
reduced by $100 and then again by 10
percent of your adjusted gross income.
The IRS has also waved the 10 percent of
adjusted gross income reduction for
Hurricane Ike victims.
How do you prove a casualty loss to the IRS?
This is a very good question, and there
isn’t any one correct answer. The best
answer is to document your loss as to the
type of loss and when it happened and
show how the loss was a result of a casualty. You also need to keep records that
show you owned the property and that
show the cost to repair or replace the
property. The very best course of action
is to contact your tax professional and
determine where you have a deductible
loss and what records should be kept
and attained.
What problems or issues can arise when filing for casualty losses?
The most common problems the individual taxpayer encounters are insurance proceeds that are received after a
loss has already been taken on his or her
individual returns. If you received less
than expected when you calculated your
casualty loss, you can include the difference in the year you do not expect any
more reimbursements. If you receive
more than you expected, then you would
include the difference as income in the
year you received it. Please note that the
taxpayer does not have to include the difference in income unless the taxpayer
reduced his or her taxes in a previous
year. So, if you did not have any taxable
income to offset in a previous year in
which the loss was taken, then you do
not have to include additional insurance
proceeds as income.
RENE LOZANO, CPA, is a manager in the Tax Department at Briggs & Veselka, Co. Reach him at [email protected] or
(713) 667-9147.
