Living in the Midwest comes with plenty of perks. One of these perks is experiencing every season: gorgeous Autumns, frosty Winters, serene Springs, and blistering Summers. Unfortunately, Midwesterners also know severe weather all too well.
It seems that every year, a storm of epic proportions hits too close to home. While there is certainly no complete remedy for the despair these disasters cause, taxpayers may be able to take a tax deduction for their losses. These losses are considered casualty losses, and there are two categories:
Personal
Non-business, or “personal”, casualty losses are deductible in the year incurred. First, it is important to note that casualty losses must be sudden or unexpected. Once this criteria is established, the amount of loss must be determined. The loss is the lesser of the adjusted basis of the property or the decrease in the fair market value (FMV) due to the casualty, less any insurance proceeds. This amount is then reduced by $100, and the remaining amount in excess of 10% of adjusted gross income (AGI) is the deductible amount.
To illustrate, let’s look at an example: A large storm rolls into town and rips off the roof of your house. The roof has an adjusted basis of $10,000 and the decline in FMV is $7,000. The loss would be the lesser of the adjusted basis or the decrease in FMV; $7,000 in this case. The insurance company reimburses $1,000 of the loss, and your AGI is $50,000.
The calculation of the potential casualty loss deduction is: $7,000 loss – $1,000 insurance proceeds – $100 – $5,000 (10% x $50,000 AGI) = $900 casualty loss.
While the ability to deduct these losses is good news, casualty losses for individuals are included in itemized deductions. If you do not itemize your tax deductions, you are not eligible for this deduction.
Business
Casualty losses on business assets are 100% deductible- no $100 reduction and no 10% AGI reduction. There are two kinds of business casualty losses: a “total” loss and a “partial” loss.
A total loss occurs when business property is completely destroyed. When this is the case, the loss deduction is: The adjusted basis of the property less any salvage value less insurance proceeds. As an example, let’s say a tornado hits the city and completely destroys a truck used in your business. The truck has an adjusted basis of $25,000, $0 salvage value, and the insurance company reimburses $12,000.
The calculation for this business casualty loss is: $25,000 adjusted basis – $0 salvage value – $12,000 insurance proceeds = $13,000 casualty loss.
A partial loss occurs when business property is only partially destroyed. With a partial loss, the amount of loss is the lesser of the adjusted basis of the property or the decrease in FMV, less any insurance proceeds. Again, let’s use an example to illustrate: A tornado hits the city and destroys a portion of your business building. The building’s adjusted basis is $100,000 and the decrease in FMV is $20,000. The amount of the loss is the lesser of the adjusted basis or decrease in FMV, which is $20,000. The insurance company reimburses $5,000 of the loss. Thus, the business may take a casualty loss of $20,000 less the insurance proceeds of $5,000 or $15,000.
For more information on casualty losses, and whether or not a loss may be deductible for tax purposes, contact an Anders tax advisor.
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