Casualty Losses

A deductible loss can result from a number of events. Here are some examples:
•Storm (including hurricanes and tornadoes). •Flood and wind, •Fire, •Earthquake,
•Other “sudden and unexpected events,” such as an automobile accident, also qualify as a casualty for tax purposes.

The allowable deduction for business property destroyed in a casualty is usually different from the loss of personal property.
If the property is used in a trade or business or other activity conducted for profit, the allowable deduction is the lesser of the property’s adjusted basis (before the casualty) or its decline in value because of the casualty.
If business property is completely destroyed, the deduction is the full amount of the property’s adjusted basis, reduced by any insurance recovery, even if the basis exceeded the property’s value before the casualty.
If you have disaster-related losses to business assets, you don’t have to worry about the $100 subtraction rule or the 10% of AGI subtraction rule. Instead, you can deduct the full amount of your uninsured loss as a business expense

The taxpayer Has the Burden of Proof. To deduct a casualty loss, the taxpayer must meet all of the following tests and requirements to take a casualty loss:
•Be able to show that there actually was a casualty loss including showing all of the following:
The type of casualty, Its date of occurrence, That the loss was a direct result of the casualty , That the taxpayer owned the property or was liable for the damage to the owner of the property, and whether there is a claim for insurance reimbursement with a reasonable expectation of recovery. and Justify the amount taken as a deduction.

Unlike business property, if personal property is completely destroyed, the loss cannot exceed the decline in value from the casualty, even if this is less than the basis.
If property owned outside of the business or investment setting, like a personal residence, is damaged, the loss is the lesser of the property’s decline in value or its adjusted basis, reduced by insurance proceeds or other reimbursement.

Large assets that are lost due to a storm may generate unreimbursed losses that exceed income in the year that the loss is being claimed.
Regardless of whether the casualty loss relates to business, income-producing activity or personal-use assets, the loss can generate a Net Operating Loss (NOL), which can be carried to other tax years either backwards or forwards.
The tax code provides that losses that meet the casualty requirements are not considered passive activity losses and are fully allowable.

After the occurance of Hurricanes Katrina, Rita and Wilma, Congress acted to eliminate the 10% of AGI limitation as well as the $100 subtraction. As of today 3/7/13 Congress has not acted to extend similar tax law changes for the victims of Hurricane Sandy. Taxpayers should contact their local Congressman and ask them to vote ASAP.
The current law is as follows:
After you have figured the amount of your loss, you must figure how much of the loss you can deduct. If the loss was to property for your personal use or your family's, there are two limits on the amount you can deduct for your casualty or theft loss.
1.You must reduce each casualty or theft loss by $100 ($100 rule). 2.You must further REDUCE the total of all your losses by 10% of your adjusted gross income (10% rule).

You figure the amount of your loss using the following steps.
1.Determine your cost or other basis in the property before the casualty or theft.
2.Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. (The decrease in FMV is the difference between the property's value immediately before and immediately after the casualty or theft.)
3.From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive

After you have figured the amount of your loss, as discussed earlier, you must figure how much of the loss you can deduct. You do this on Form 4684, section A. If the loss was to property for your personal use or your family's, there are two limits on the amount you can deduct for your casualty or theft loss.
1.You must reduce each casualty or theft loss by $100 ($100 rule).
2.You must further reduce the total of all your losses by 10% of your adjusted gross income (10% rule).

You can generally deduct a casualty or disaster area loss only in the tax year in which the casualty or disaster occurred. You can generally deduct a theft loss only in the year you discovered your property was stolen. However, you can choose to deduct disaster area losses on your return for the year immediately before the year of the disaster if the President has declared your area a federal disaster area.
For details, see Disaster Area Losses in Publication 547.